ESG money goes passive as active funds fight for scale

While low-cost responsible passive funds continue to see the majority of fund flows, active strategies, however, are fragmented between winners and losers, with some funds folding due to lack of scale.

This is indicative of a maturing sector that has evolved from a standalone product to a strategy that is increasingly integrated into mainstream investment processes.

Rainmaker Information data shows that 28 environmental, social and governance (ESG) funds launched over the past five years, while 16 were shuttered.

Perennial Partners recently closed three responsible investment funds - the Perennial Better Future Trust, Perennial Better Future Active ETF and Melior Australian Impact Fund - with about $140 million in collective funds under management (see pg. 21).

"We're a house of multi-boutiques, and the level of integration of ESG across those individual boutiques and embedded into their investment processes really has come a long way compared to, say, 10 years ago when it was something that was on the side," Perennial Partners head of distribution Cesar Farfan says.

The decision to terminate the funds was a matter of scale and commercial viability, he explains, "irrespective of whether they were ESG or not."

Ian Woods Advisors founder Ian Woods notes there has been consolidation in ESG funds management as a result of competition in the space.

"It has been challenging for many of those standalone funds with regard to performance over the last couple of years," Woods says.

"The exposure that typical funds might have, or the lack of exposure, has now led to some underperformance over the last couple
of years."

While absolute performance was acceptable, Farfan says several factors have detracted ESG funds. On top of ESG headwinds, he adds that the lack of exposure to certain sectors, such as resources, have led to ESG strategies lagging and underperforming.

The 40 largest ESG funds shed $910 million over the three years to June 2026, Rainmaker estimates, though flows have stabilised in the last year, with $506 million flowing in.

Passive funds, however, are seeing the highest inflows. Vanguard's International Shares Select Exclusions Index Fund saw $606 million in inflows in the last year.

Russell Investments' Low Carbon Global Shares Fund recorded $529 million in inflows, while the SPDR S&P/ASX 200 ESG ETF took in $317 million.

While index funds take the top spots, active funds remain more fragmented. Some managers capture consistent market share, while others secure consistent fund flows. Others struggle with outflows.

For example, Munro's climate change fund secured $112 million in net inflows over three years, accelerated by an $80 million surge in the last 12 months.

Conversely, over the same periods, Pendal's sustainable fund bled $103 million, although it has stabilised with $34 million in inflows.

"Across active funds management, you're seeing lots of closures. ESG is just one subset. If you look at the flows, say, over the last 12 months across the funds management space, [it] is largely dominated by money going to low-cost passive ETFs, and then in the active space, you've got winners and losers," Farfan says.

"It's a general challenge for active managers. Full stop. If you then put the lens on ESG, I think that's got its own specific set of challenges."

Farfan, however, doesn't expect a return to how things were. He likens ESG to electric windows in cars: what was once an optional extra that a dealer would recommend is now a standard feature. Funds work the same way, he says, whether it's E, S or G, it is now part of the investment process.

He notes that investors still gain exposure to sustainable themes such as the energy transition and decarbonisation via Perennial's resources-focused funds.

"Our resources fund is not investing in things like coal production or iron ore. It's investing in resources that will contribute and help the whole decarbonisation and energy transition," Farfan says, adding this effectively applies an ESG lens on the fund.

Taking the longer view, Woods still sees growth in both ESG integration and standalone funds.

The past couple of years have been challenging in the US and Europe, he says, but the good news is that both markets have seen a turnaround in inflows over the last six months. fs