Sustainable funds hit AUM record despite ETF outflows

Sustainable investment funds had a banner year in 2023, but strong asset growth and increasing product launches occurred alongside outflows for sustainable ETFs.

Assets under management (AUM) for these funds grew to $45.8 billion as of Dec. 31, 2023, the highest-ever figure and a 21% increase from a year earlier, according to a report from Chicago-based Morningstar Direct.

Most of that increase came from market appreciation, which offset a year of tepid inflows. Only $2 billion flowed into sustainable funds in 2023, down significantly from the $12.7-billion peak of 2021 and lower than the $5.2 billion in inflows in 2022.

Despite last year’s lacklustre inflows, some new funds did exceptionally well. For example, the Sun Life Acadian International Equity Fund amassed $720 million in assets in its first year.

Danielle LeClair, director of manager research with Morningstar Canada and author of the report, attributed this success in part to the increased integration of sustainable funds into balanced funds of funds and multi-asset products.

“As you’re seeing balanced products dive more into sustainability, you’re seeing some of that impact on flows,” she said.

Amid the tepid flows overall, sustainable ETFs saw net annual outflows for the first time, losing $45.9 million. The fourth quarter of 2023 saw the worst outflows, with more than half of sustainable funds — both mutual funds and ETFs — losing assets during the period.

The fourth quarter also was difficult for U.S. sustainable funds, which have experienced a more pronounced slide in interest. Q4 was “the fifth consecutive quarter where investor appetite for U.S. sustainable funds was weaker than for their conventional counterparts,” Morningstar said.

“Political scrutiny is not as much of a driver in Canada,” LeClair said when asked about the different experiences for Canada and the U.S. She also said the work of the Canadian Investment Funds Standards Committee (CIFSC) to standardize fund definitions has helped to clear up lingering confusion in the marketplace north of the border. (LeClair also chairs the CIFSC.)

Morningstar found that 2023 was the best year for Canadian sustainable fund performance, with more than 30% of these funds ranking in the top quartile of their categories for the first time. Additionally, 55% ranked in the top half of their categories.

However, on a three- and five-year basis, sustainable funds tended to underperform, with more than half of sustainable funds ranking in the lower two quartiles relative to peers.

Nonetheless, fund manufacturers were bullish on sustainable products last year, Morningstar found.

Seventy-eight funds launched in 2023, up from 64 in 2022 and 74 in 2021. Only five of the funds launched in 2023 were ETFs, however — the fewest launched in the past five years.

As of Dec. 31, there were 327 sustainable funds total in Canada, representing a tripling in number over the past five years.

Morningstar found the field for sustainable funds has diversified significantly since 2019, with the largest player, NEI Investments, going from 55.3% market share that year to 21.8% in 2023. Desjardins had the next-highest market share in 2023, at 16.2% and a marked increase from 2.9% in 2019 when it was in eighth place.

National Bank rounded out the top three, with 13.6% market share last year. The firm wasn’t in the top 10 in 2019.

Lower fees for sustainable funds

As for the cost of investing in sustainable funds, Morningstar found that sustainable funds charge less than their conventional peers across all distribution channels except institutional. Sustainable ETFs charge 0.23 basis points less than conventional ETFs, it found.

LeClair said this is likely due to in part to the growing nature of the Canadian sustainable fund market, as providers may try to attract investors with lower fees. Further, she said that the advent of more complex strategies among conventional ETFs, such as liquid alternative strategies, may have increased the average price for non-sustainable ETFs.

Overall, LeClair is optimistic for continued growth in the sustainable fund space.

Considering ESG in portfolio construction “is going to become more normalized,” she said. “The fact that we’re seeing ESG strategies going into conventional funds is, to me, a reflection of the appreciation that ESG risk management is risk management, period.”

Morningstar updated its methodology for identifying sustainable funds based on the CIFSC’s responsible investing framework, released in January 2023. Based on CIFSC criteria, the most common category for sustainable funds is ESG integration and evaluation.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.