Environmental, social, and government (ESG) funds proved resilient during 2018, according to research by Morningstar, despite a difficult market environment marked by elevated volatility and broad declines in stock and bond prices.

ESG funds proved resilient during 2018 despite a challenging market environment.
In a new report, European Sustainable Funds: 2018 in Review, Morningstar provides analysis into ESG fund flows, assets, performance, and fees relative to the total European fund universe.
It found that while net flows into European-domiciled funds that incorporate ESG factors fell to €34.4 billion in 2018 – from €57.9bn the previous year – the 40% decline in new money was significantly smaller than the 80% slump suffered by the overall fund universe.
Assets in sustainable funds were down by 1.3% to €684bn at the end of the year, comparing favourably to a larger decline in overall European fund assets of 3.9% over the same period.
Passive sustainable funds bucked the overall trend of net outflows, however, recording an increase in assets of 5.3% to €76.9bn. Index funds and ETFs with an ESG mandate or theme now represent 11.2% of the European sustainable fund market, up from 6.4% five years ago.
The research reflects similar trends reported by ETF industry consultant ETFGI which show that ESG classified ETFs and ETPs listed globally gathered $7.6bn in net new assets during 2018, helping to increase their total assets by 29.5%.
A record 70 new ESG ETFs/ETPs were launched during 2018, and 27 different issuers brought an ESG ETF/ETP product to market during the year, reflecting ETF providers’ predictions for future ESG demand.
Morningstar’s research also shows that sustainable funds performed well relative to conventional peers with 62% of ESG funds finishing the year in the top half of their Morningstar categories.
Hortense Bioy, Director, Passive Strategies and Sustainability Research, Europe, commented, “2018 was a tough year for investors, with broad declines in stock and bond prices affecting their returns.
“Sustainable funds, however, demonstrated resilience. This is hardly surprising. What these funds share is the consideration of ESG factors, which leads them to companies that are managing environmental and social issues effectively and have strong corporate governance practices. These tend to be lower-volatility and higher quality companies that hold up better during downturns.”