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‘ESG investment boom ends’ as record £1bn ditched in August

Paloma Kubiak
Written By:
Paloma Kubiak

Environmental, Social and Governance (ESG) equity funds suffered their fourth consecutive month of outflows, with investors pulling a record £953m from their holdings in August.

The total withdrawn from ESG equity funds since May stands at £1.96bn, while before this year, only one month had seen outflows since the ESG boom began in 2019.

Outflows from equity funds reached their highest level since September 2022, collectively shedding £1.19bn in August.

This is the seventh worst month on record, according to data from global fund network Calastone, adding that investors “ran scared” amid the falling markets.

Global stock markets peaked at the very end of July 2023, not far below the all-time high they reached near the end of 2021. But they lost around 6% in the first half of August, with the global index ending the month down just under 3%.

UK, US and fixed income funds all suffer

UK-focused equity funds were hit hardest with redemptions totalling £811m – the highest since February. August also marked 27 months in a row in which investors withdrew capital from these holdings.

US equity funds had their second-worst ever month with outflows of £620m, taking the total net selling to £3.05bn in the last 12 months. Elsewhere, income funds had their fifth worst month on record with outflows of £632m, while European, Asia-Pacific, country and sector funds all saw outflows.

Meanwhile, fixed income funds also suffered their first outflows since June last year after investors added £5.78bn between January and July this year. In August, investors sold a net £330m of their holdings. Property and mixed asset funds were also hit with further net selling.

Instead, investors focussed on global funds with inflows of £1.18bn recorded in August. Money market funds added £673m which is the second highest inflows in Calastone’s nine-year record “as investors bought into high interest rates and safe-haven status”. These are also offering the best income since before the global financial crisis, Calastone noted. Emerging markets gained £180m of investor cash.

Indeed, funds with a global mandate and emerging markets have been the only two categories of equity funds to experience inflows in 2023, notching up £9bn and £1.1bn respectively in the year-to-date.

‘Fear was a big motivator in August’

 Edward Glyn, head of global markets at Calastone said: “Fear was a big motivator in August. Discouraging economic data in the UK showed core inflation has proven resistant to rate hikes, while the US economy has shown signs of accelerating in recent weeks – expectations of yet more rate hikes are bad news for asset prices. Bond yields pushed higher as a result, dragging stock markets and bond prices lower. This had investors running for the safety of cash and money market funds.

“Tepid economic data in the second half of the month boosted hopes that central banks may begin to lower interest rates sooner rather than later after all, and that has driven the market rally. But it’s not been enough to tempt fund investors back into riskier assets. A clearer prognosis from central banks this month would help investors set their direction for the next few months.”

Glyn added that the move out of ESG funds has gathered pace in a “remarkable reversal after the boom in recent years”.

He said: “Four months of outflows signals a new trend emerging that fund houses will have to work hard to counteract. ESG funds are mainly actively managed, so they have offered a helpful bulwark against the rise of index funds. With ESG now tracking backwards, index funds are once again beating their active counterparts for new capital.”