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Tuesday, September 10, 2024

Decline in ESG Fund Launches: Reflections and Prospects Amid Market Transition

September 10, 2024

Recently, there has been a significant slowdown in the issuance of ESG funds by some of the world's leading asset management companies. According to data provided by Morningstar Direct, companies such as BlackRock, Deutsche Bank's DWS Group, Invesco, and UBS have seen a sharp reduction in the number of new ESG fund launches this year. This trend reflects a cooling attitude towards the ESG label in financial markets, influenced by changes in the global political and economic landscape affecting ESG fund performance.

Current Status Analysis

Sharp Decline in Issuance Numbers

As of the end of May 2024, only about 100 ESG funds have been launched globally, compared to 566 for the entire year of 2023 and 993 in 2022. In May of this year alone, only 16 new ESG funds were issued, marking the lowest monthly issuance since early 2020. This data indicates a significant slowdown in the pace of ESG fund issuance.

Multiple Influencing Factors

  1. Political and Regulatory Pressure: In the United States, ESG is under political attack from the Republican Party, with bans and lawsuit threats being frequent. In Europe, stricter ESG fund naming rules have forced some passively managed portfolios to drop the ESG label.
  2. Poor Market Performance: High inflation, high interest rates, and a slump in clean energy stocks have led to poor performance of ESG funds. Those that perform well are often heavily weighted in tech stocks, which have questionable ESG attributes.
  3. Changes in Product Design and Market Demand: Due to poor product design and more specific market demand for ESG funds, many investors are no longer interested in broad ESG themes but are instead looking for specific climate solutions or funds focusing on particular themes such as net zero or biodiversity.

Corporate Strategy Adjustments

Facing these challenges, some asset management companies have chosen to reduce the issuance of ESG funds. BlackRock has launched only four ESG funds this year, compared to 36 in 2022 and 23 last year. DWS has issued three ESG funds this year, down from 25 in 2023. Invesco and UBS have also seen significant reductions in ESG fund launches.

However, some companies view this trend as a sign of market maturity. Christoph Zschaetzsch, head of product development at DWS Group, stated that the current "white space" for ESG products has reduced, and the market is entering a "normalization" phase. This means the focus of ESG fund issuance will shift to fine-tuning and adjusting existing products.

Investors' Lessons

Huw van Steenis, partner and vice chair at Oliver Wyman, pointed out that the sharp decline in ESG fund launches is due to poor market performance, poor product design, and political factors. He emphasized that investors have once again learned that allocating capital based on acronyms is not a sustainable strategy.

Prospects

Despite the challenges, the prospects for ESG funds are not entirely bleak. Some U.S.-based ESG ETFs have posted returns of over 20% this year, outperforming the 18.8% rise of the S&P 500. Additionally, French asset manager Amundi continues its previous pace, having launched 14 responsible investment funds in 2024, and plans to expand its range of net-zero strategies and ESG ETFs, demonstrating a long-term commitment and confidence in ESG.

The sharp decline in ESG fund issuance reflects market transition and adjustment. Despite facing multiple challenges such as political, economic, and market performance issues, the long-term prospects for ESG funds remain. In the future, asset management companies need to more precisely meet specific investor demands and innovate in product design and market strategy to adapt to the ever-changing market environment.

TAGS:

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