Sustainable funds that consider factors such as companies' carbon footprints and workforce diversity were able to attract new investments even during the market selloff of 2022. According to Morningstar, investments into US sustainable funds, including stocks, bonds, and other categories, fell to $3.1 billion in 2022 from $69.2 billion in the previous year. Conventional funds that do not consider environmental, social, or governance (ESG) factors suffered more than $370 billion in withdrawals in the same period.
Fixed-income funds accounted for the majority of the inflows into sustainable funds, with $2.4 billion, or about 75%, being invested in sustainable bonds. The growth of sustainable bond funds was surprising given that the rising interest rates of the year had punished many bondholders. The Calvert Bond Fund, for example, drew in $413 million in investment in 2022 and outperformed its benchmark due to a shorter duration and an overweighting of asset-backed securities, including those for renewable energy projects.
Sustainable funds are benefitting from the trend of investors looking for greener investments in response to climate change and governments setting ambitious climate targets. The Hartford Schroders Sustainable Core Bond Fund, for example, had $109 million invested in it last year despite underperforming its benchmark. The inflows into these funds were likely driven by investors reallocating capital into sustainable products with similar performance to conventional funds.
While most sustainable funds underperformed their non-ESG counterparts in 2022, according to Morningstar, some of them held up better than the broader market. ESG investing is facing challenges from various quarters, including Republicans working to prevent investors from considering climate and social risks and increased scrutiny of the market for offerings that overstate their climate bona fides. The Securities and Exchange Commission has also proposed tightening rules around ESG-related offerings that could lead to better disclosures and product names.
