Sustainable Investing Trends Monitor-August 1, 2024

Long-Term Net Assets:  Sustainable Mutual Funds and ETFs 

Focused sustainable long-term fund assets under management attributable to mutual funds and ETFs (excluding money market funds), 1,451 funds/share classes in total, based on Morningstar classifications, closed the month of July at $349.4 billion.  This represents a $6.6 billion net increase, or a net gain of 1.9% versus $342.8 billion the previous month.  This also brings the combined total of focused sustainable long-term mutual funds and ETFs to within $100 million of the month-end high point for assets reached in March of this year.   

Based on a simple calculation that reflects the average July total return gains recorded by long-term mutual funds at 2.1% and 2.7% by ETFs, it is estimated that sustainable funds experienced cash outflows during July in the amount of $1.1 billion–offset by capital appreciation.  Since the start of the year, focused sustainable mutual funds and ETFs have added a combined $17.7 billion in net assets, for an increase of 5.3%.  Mutual funds accounted for about 3X of the gain.          

New Sustainable Fund Launches

There were no new mutual fund or ETF launches in July, reflecting a continuing drought in sustainable fund launches.  During the seven-month interval to the end of July, a total of five fund launches were recorded, all ETFs.  This record stands in sharp contrast to the 62 funds that were launched during the comparable period in 2023.  

During the month of July, there were two ETF closures, both managed by Rafferty Asset Management, including the $3.3 million Direxion Dollar Global Clean Energy Bull 2X Shares and the $21.3 million Direxion Hydrogen ETF.  The management company noted that the decision to close the funds was based “on the view that each fund could not conduct its business and operations in an economically efficient manner over the long term due to each fund’s inability to attract sufficient investment assets to maintain a competitive operating structure.”

The scarcity in sustainable fund launches, starting after May of last year, may be attributable to the fact that anti-ESG movement in the US had gained momentum in the second quarter of 2023 and fund companies may have opted to lower their profile by curtailing focused fund launches.  At the same time, commitments to ESG integration do not appear to have subsided, based on reporting by the largest fund companies.  

Green, Social and Sustainability Bonds Issuance 

The latest available data according to SIFMA shows that global green, social and sustainable bond issuance in the second quarter of 2024 reached $207.1 billion.  This represents a quarter-over-quarter decline of $62.4 billion, or a drop of 23.2%.  Green bonds accounted for 68.3% of global issuance while sustainability bonds and social bonds represented 19.7% and 12.0%, respectively, of total issuance.  Global issuance year-to-date reached $476.6 billion versus $468.9 billion over the comparable period in 2023.  This is a slight $7.7 billion pick up in sustainable bond issuance, or an increase of 2%. 

US sustainable bond issuance in the second quarter registered $37.0 billion, down $6.5 billion from $43.5 billion issued in the first quarter of 2024, or a 2% decline. That said, June saw a slight pick-up in issuance, increasing from $11.9 billion to $13.2 billion.

Short-Term Relative Performance:  Selected ESG Indices vs. Conventional Indices

The S&P 500 posted its best single day return of the month, up 1.58%, on July 31st, to end the month of July with a total return gain of 1.2% (this was before giving up 6.1% over the first three days of August when markets dropped across the globe, presumably instigated by weaker than expected US jobs report.  Markets pretty much recovered by the end of the second full week of August).  The Nasdaq 100 dropped 1.6% in July, value outperformed growth stocks and small as well as mid-cap stocks added 10.2% and 5.9%, respectively, in a rotation by investors from mega cap stocks to smaller companies and other sectors fueled by falling inflation and the anticipation of interest rate cuts that will stimulate wider economic growth that will benefit smaller companies.  The Russell 2000 small-cap index has surged 7% since July 11 to the end of the month, while the S&P 500’s gains have been led by financials, energy, and real estate sectors. Magnificent Seven tech stocks (i.e. Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla) had seen declines, exacerbated by a global sell-off in semiconductor companies. 

US bond prices got a lift as yields on 10-Year US Treasury securities ended the month at 4.1%, dropping by 27 basis points from 4.4% at the end of June in anticipation of lower rates.  The Bloomberg US Aggregate Bond Index outperformed the S&P 500 in July, adding 2.3%.  Year-to-date and 12-month gains were solidified, coming in at 1.6% and 5.1%, respectively.

While emerging markets eked out a narrow 0.3% uptick in July, the MSCI ACWI ex USA and MSCI EAFE indices exceeded the results achieved by larger cap US indices, adding 2.3% and 2.9%, respectively.  

Reversing a three-month trend of outperformance, a selection of five US and international equity ESG Leaders indices and one fixed income benchmark, constructed by MSCI around ESG screening and exclusionary criteria, was dominated in July by ESG indices that trailed their conventional counterparts.  Of the five equity-oriented ESG Leaders indices, three foreign indices fell behind their conventional counterparts in July while one index, consisting of large and mid-cap US-based stocks, underperformed.  The sustainable investment-grade intermediate bond index came in even with its conventional counterpart while the MSCI USA Small Cap ESG Leaders Index was the only one to outperform its conventional counterpart.  Total return performance deviations ranged from 12 basis points to 92 basis points 

Over the intermediate and long-term time frames, relative results are mixed.