There’s no hotter area on Wall Street than ESG with sustainability-focused funds nearing $2 trillion

on May1
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Sustainability-focused funds attracted record inflows during the first quarter, pushing global assets under management in ESG funds to nearly $2 trillion, according to a report from Morningstar released Friday.

The rise underscores the momentum behind ESG investing, or when environmental, social and governance factors are considered. Assets in these types of funds first topped $1 trillion in the second quarter of 2020.

Global sustainable funds attracted a record $185.3 billion during the first quarter of 2021, up 17% quarter over quarter. Overall, assets in ESG funds jumped 17.8% compared to the fourth quarter of 2020.

“2021 began where 2020 left off with record demand for sustainable investment options across the globe,” noted Hortense Bioy, global director of sustainability research at Morningstar.

Europe accounted for over 79% of total fund flows, although other regions are allocating more and more to ESG funds.

In the U.S., sustainability-focused funds attracted nearly $21.5 billion in net inflows, a new record. The figure more than doubled year over year, up from $10.4 billion during the first quarter of 2020, and was roughly five times larger than 2019’s first quarter flows.

According to Morningstar, the five funds that attracted the most inflows in the first quarter were: iShares Global Clean Energy ETF, iShares ESG Aware MSCI USA, First Trust Nasdaq Clean Edge GreenEnergy, iShares ESG Aware MSCI EAFE and iShares ESG Aware MSCI EM.

Sustainability-focused funds that attracted most money during Q1

Fund name Ticker Q1 inflows in billions
iShares Global Clean Energy ICLN $1.98
iShares ESG Aware MSCI USA ESGU $1.33
First Trust Nasdaq Clean Edge GreenEnergy QCLN $1.00
iShares ESG Aware MSCI EAFE ESGD $0.87
iShares ESG Aware MSCI EM ESGE $0.82

ESG investing was already gaining momentum before the pandemic hit. But it’s since accelerated driven by a number of factors, including Covid’s disproportionate toll on minorities, social unrest that’s swept the U.S., as well as devastating wildfires and deadly winter storms.

“Over the past year, a broad consensus on the need to address climate risk in investment portfolios has emerged,” Morningstar said in a recent report. “More investors see the green transition to a low-carbon economy as an investment opportunity. Asset managers are therefore rapidly developing new risk-management solutions, launching innovative products, and retooling existing ones to help investors decarbonise their portfolios and invest in green solutions,” the firm added.

“ESG” is an umbrella term that can contain a host of different investing strategies, which is partly why it has faced criticism. Opponents cite a lack of transparency.

For the “E” specifically, Morningstar said there were 400 climate-aware funds at the end of 2020. The firm said these can be sub-divided into five categories: low carbon, climate conscious, green bond, climate solutions and clean energy/tech.

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