Australian passive sustainable funds grow to $3.6 billion: Morningstar

Australian passive sustainable funds stand at $3.6 billion, but launches of passive sustainable funds have slowed after a peak in 2018, according to research from Morningstar.

Morningstar tracked the growth of sustainable passive funds, that as of June 30, 2020, there were 534 sustainable index mutual funds and exchange-traded funds globally, with collective assets under management of $250 billion. Both the number of products and the money invested in them have more than doubled over the past three years.

In Australia, there are currently 17 passive sustainable funds, including 8 ETFs. Morningstar notes that Vanguard has the market share in passive sustainable funds, with nine offerings constituting 65% of market. The remaining eight funds consist of three funds provided by BetaShares, two by VanEck, and one fund each by BlackRock (iShares), Russell, and State Street.

"It's fair to say that the passive retail market is dominated by a few players," said Aman Ramrakha, director of manager research, Morningstar. "There are limited players in the space so it's not surprising that the sustainable offering is somewhat limited. We're seeing a bit more product coming thru on the active side of the equation, it's fair to say that more and more active managers are launching product or repurposing product for the ESG sustainable space."

During 2018, Vanguard launched an ETF and an unlisted fund each in the equity (tracking the FTSE Developed ex Australia Choice Index) and fixed-income (tracking the Bloomberg Barclays MSCI Global Aggregate SRI Exclusion Float Adjusted Index) segments during 2018, while VanEck came out with a sustainable equity ETF (tracking the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index) in the same year.

"However, after the hype of launches in passive sustainable funds in 2018, 2019 was a quieter year, with only two launches, followed by no launches so far in the first six months of 2020," the report noted.

In July 2020, BetaShares launched a currency-hedged version of its ASX-listed sustainability ETF - the BetaShares?Global Sustainability Leaders ETF - Currency Hedged (ASX: HETH).

Research from Rainmaker Information has found that the assets under management for ESG-themed exchange traded products (ETPs) have tripled in the last three years.

"Three years ago ETP products incorporating Environmental, Social and Corporate Governance (ESG) principles represented 1% of the Australian market," the latest Rainmaker ETP report stated. "Following rapid growth and some impressive performance, that proportion has tripled to 3% of the market, or 1.8 billion as at June 2020."

Rainmaker Information's research noted that the growth in ESG products has outpaced the wider ETP market. The report notes that "since June 21017 the overall ETP market grew by 31% pa from $29.3 billion to $65.6 billion, Smart Beta products grew by 60% pa from $1.3 billion to $5.4 billion. ESG products meanwhile grew 76% pa from $325 million to $1.8 billion."

Growth for passive funds is coming from the retail and institutional sectors, Ramrakha said.

"You are seeing demand starting to pick up in the retail landscape, albeit off a fairly low base," Ramrakha said. "Whilst numbers look good in growth terms, the overall numbers against the market are still quite low. Our report suggest that it's dominated by Europe in the first instance, while the US is growing, and the rest of the world has pockets of growth, Australia being one of them. We anticipate those numbers continuing to grow."

Morningstar noted that assets under management in Australian passive sustainable funds nearly doubled, from US$1.84 billion in December 2018 to $3.59 billion in June 2020.

Globally, the numbers have continued to grow, Morningstar said.  Both the number of products and the money invested in them have more than doubled over the past three years. Europe remains the largest market for sustainable passive funds, accounting for more than three fourths of global assets. The U.S. represents 20%, up from 13% three years ago.

The total number of sustainable passive funds available to investors globally more than tripled over the trailing five years to the end of June 2020. New fund launches reached a record 98 over 2019, and with 84 new entrants in the first half of 2020, Morningstar believes global growth in 2020 will hit new records again.

Read more: MorningstarBetaSharesRainmaker InformationVanEckVanguardAman RamrakhaBlackRockRussellState Street
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