ISS Market Intelligence (ISS MI), a unit of Institutional Shareholder Services and a leading provider of data, analytics, insights, media, and events solutions to the global financial services industry, announced the release of its State of the ESG Fund Market report with analysis and outlook for ESG funds in the U.S. market.

The report finds that long-term ESG mutual fund and ETF assets in the U.S. reached $400 billion by year-end 2021, up from $303 billion a year earlier but remaining relatively low in terms of the overall mutual fund and ETF market. Long-term ESG funds attracted $59 billion in net flows, virtually matching the 2020 record. The pace of growth slowed slightly, though. Organic growth, which measures flows relative to beginning AUM, clocked in at 19 percent, down from 32 percent in 2020.

ESG funds have been dependent on attracting new investments for growth, mainly to the benefit of index funds, according to the report. ISS MI’s competitive intelligence platform, Flowspring, estimates half of net ESG fund sales were funded with capital not already held in other mutual funds and ETFs in 2021; 80% of these newly invested dollars ended up in index funds.

“With the ESG fund market still young, the opportunity for asset managers to attract new investors is vast,” said Christopher Davis, lead author and Head of U.S Fund Research at ISS MI. “Winning their loyalty will be challenging, however, as organizations will need to make clear the value ESG brings to investors’ portfolios.”

Meanwhile, ESG ETFs accounted for a disproportionate share of the fund industry’s most successful product launches. The report finds the top 10 ESG fund launches netted more than $100 million of in-flows for the year.

At the same time, the report notes that with Democrats far more worried about issues like climate change than Republicans, America’s highly partisan politics threatens to limit interest in ESG investments to one side of the political aisle. Analysis of state-level active mutual fund sales data from ISS’ Simfund Distribution consortium members show “blue” states accounting for an outsized slice of active ESG fund flows in the 2020-2021 period. Even so, the report finds that ESG fund sales were broader than a simple red/blue analysis would predict: active ESG mutual fund flows still grew at a faster rate than non-ESG fund flows in 32 states (plus the District of Columbia).

U.S. fund managers’ product development engines shifted into higher gear in 2021, according to the report, launching a record 133 new ESG funds – well above the 75 new offerings debuted in 2020. The 2021 vintage exhibited more of a global flair, with international equity funds making up a plurality of the launches. Bond funds also proliferated as more than twice as many went live in 2021 than in the prior year. Product development also shifted toward ETFs—especially active ones. Almost as many active ETFs (37) came online as passive ones (42).

“Fund managers will only become better at satisfying investor preferences as the ESG market differentiates along product lines,” Davis said. “In the coming years, this ability will reach its zenith as money managers enable investors to personalize their portfolios at a mass scale.”

Source: ISS Market Intelligence