ESG Investing is dominated by Climate-Focused Funds

The attraction to green money has been fueled in part by growing awareness to climate change, which was further exposed at the COP26 global summit on Climate Change in Glasgow this month.

Global media pays a lot attention to environmental issues. Investment flows reflect that.

James Penny,

TAM Asset Management in London, chief investment officer. Every headline that ran from Australia to COP26 was dominated in part by our efforts on climate change.

According to Morningstar, funds with the attributes low carbon/fossil-fuel-free, and environmental had inflows of $28.33 billion and $13.53 billion, respectively, from January through October. Morningstars analysis can show multiple attributes to a fund, so inflows from individual funds may appear more than once.

Nongreen funds are less green

These strong environment-themed flows contrast well with the less popular funds that were attracted $7.53, $5.99, and $5.12 billion for the ten months.

Sometimes, the sole focus on the environment can be at the expense social and governance factors.

Jake Walko

Thornburg Investment Management is the director of ESG investing. According to him, ESG funds that are more focused on the environment outdraw other ESG funds because they can use quantifiable metrics as a guide and demonstrate their focus more than funds that are more subjective.

Due to the lack of interest in funds that focus on social issues, there is a reduced range of investment products available in this sector. The three Morningstar categories of gender, other impact and community development each had far fewer than 100 available funds at the end of October, compared with 165 funds with a low carbon/fossil-fuel-free attribute.

But that may be temporary as Wall Street reacts to shifting investor interests. As such, we are seeing more products that are focused on gender diversity.

Todd Rosenbluth,

CFRA’s head of mutual-fund and ETF research. According to Morningstar data, the number of gender and diversity funds increased by 9% in the first ten months of the year from 46 to 50.

Many people still have questions about governance

Funds that are focused on corporate governance may be less popular than ESG funds. This is partly because it is not as easy to understand governance issues as other ESG themes. Governance is not an area that can be invested in the same way as other areas.

Hortense Bioy,

Morningstar has a global director for sustainability research.

Governance includes the management of a company, the independence and diversity of its board and the amount and type of executive compensation. Stock pickers often consider superior governance to be a selling point. Ms. Bioy explains that it is still difficult to invest solely on governance.

Mining still popular

Morningstars fund flow analysis also included natural-resource funds. These funds often hold shares of mining and fossil fuel companies. This is the antithesis of green investing, according to most investors. Through October this year, these funds attracted $12.80 trillion in inflows.

Soaring commodity prices are a reason these funds remain attractive. For example, copper and crude oil have rallied strongly after the Covid-19 pandemic.

The world still depends on the mining of minerals to produce the raw materials needed to create clean energy. Both electric vehicles and solar power require large amounts of minerals to mine.

Arthur Hogan

National Securities Corp. Chief market strategist. He says that while all this ESG investing is a step in the right direction to try to slow down global warming but there will be a transition, and that it will take some time.

Mr. Constable lives in Edinburgh, Scotland. Reach him [email protected]