Demand to invest in funds which focus on environmental, social and governance (ESG) issues jumped in 2020, driving assets under management up 29 percent in the fourth quarter to nearly $1.7 trillion, industry tracker Morningstar said on Thursday.
In a turbulent year marked by the effects of the COVID-19 pandemic, the surge in ESG assets was bolstered by stimulus-driven market recovery and as investors increasingly looked for more resilient investments.
Covering everything from how a company handles climate change or boardroom diversity to how a country is positioned to withstand the impact of changing weather patterns, the belief is that those with a good ESG score will perform better over time.
The flows have also been helped by an accelerating push from governments globally to transition to a low-carbon economy, changing market rules and tax regimes to encourage climate-friendly investments, many of which are held by ESG funds.
Given the strong demand, inflows into sustainable funds hit a record high during the fourth quarter, up 88 percent to $152.3 billion, with Europe-domiciled funds accounting for almost 80 percent of the total inflows, or $120.8 billion.
With the election of President Joe Biden in November on a ticket pledging concerted action from the world's biggest economy over climate change, U.S. funds also saw an increase in demand, capturing 13.4 percent of the net inflows, or $20.5 billion.
Flows into sustainable funds across Canada, Australia and New Zealand, Japan, and Asia took in a combined $11 billion, up from $9 billion in the previous quarter.
Equity funds continued to remain the most popular asset class for ESG investors into European funds, capturing $82 billion of the fourth-quarter net inflows. U.S. equity funds, meanwhile, took in nine out of every 10 dollars in net flows.
Keen to tap the growing demand from investors, asset managers ramped up their launch of new funds into year-end, with a record 196 hitting the market in the fourth quarter, breaking the short-lived record set in the previous quarter of 182.
Again, the increase was driven by Europe, with 147 funds launched. U.S. launches numbered 12, with the rest of the world 37.