ESG-themed investments saw strong performance and an influx of flows in 2020 and are expected to be a key driver of organic asset growth for money managers in 2021, said a report by Moody's Investors Service.
According to the New York-based ratings agency's report, "Funds & Asset Management – US: ESG investment outperformance overcomes investor hesitancy, a key barrier to growth," released Tuesday, inflows into environmental, social and governance strategies grew 140% in 2020 from the year before.
ESG-themed investments saw $80.5 billion in global net inflows in the third quarter, up 14% from the previous quarter. Sustainable fund AUM reached a record high of $1.23 trillion as of Sept. 30.
In the U.S., sustainable equity funds saw $3.8 billion in net inflows in the third quarter, while U.S. equity funds saw net outflows of $118.5 billion during the same period.
"The experience of 2020 will help remove investors' worry that ESG investing means giving up returns, which has been a widespread barrier to growth in ESG products," said Stephen Tu, a vice president and senior credit officer at Moody's, in a news release announcing the report.
"Before 2020 and the pandemic, ESG investments had met with frequent retail investor resistance because of a commonly held belief that ethically motivated investing — avoiding fossil fuels, for example — meant investors had to sacrifice profit and returns," he said.
In addition, the clean energy sector outperformed in the U.S. equities market last year. Last year, the Nasdaq Clean Edge Green Energy index, which tracks the performance of clean energy technology firms, was the top performing U.S. equity sector, with a cumulative return of 185%, 136 percentage points above the second-highest returning sector, consumer discretionary.
By contrast, the energy sector returned -33% for 2020. Traditional energy had underperformed in the prior year as well with a return of 9.4% in 2019, compared to Nasdaq's Clean Edge index, which returned 42.7%.
For 2021, Moody's forecasts that ESG investment strategies will provide significant growth for traditional asset managers. The report said that not only has the sector seen positive inflows in recent years, but "investors and asset managers now have a keener focus on ESG investment themes, ESG data and the incorporation of ESG considerations in investment analysis and product construction."
"Even in a difficult environment for equity performance, these investments have seen strong returns and AUM growth among asset managers with a stronger emphasis in ESG products," the report said.
The sector is also likely to benefit from changes enacted by the new Biden administration. These changes include reversing course from the previous administration's pullback from ESG initiatives, rejoining the Paris climate accord, reversing rollbacks of environmental rules and emphasizing growth in clean energy.