Global ESG bonds held their own in 2023, according to Barclays research released Jan. 8 that also found them outperforming ESG-labeled equity funds.
Barclays' analysis of fund flows that help gauge investor demand and allocations found that in fiscal year 2023 flows into ESG equity funds were weaker than in bond funds.
While still short of peak 2021 levels of $102 billion, ESG bond flows totaled $31 billion in 2023, up from 2022's $21 billion. Performance varied to a high degree, but most ESG bond funds saw positive net inflows and all of them surpassed the broader market, Barclays researchers found.
With few exceptions, "ESG-themed funds displayed a level of resilience despite the downbeat picture painted in recent media reports," they said, and by the end of 2023, fixed income ESG funds represented 6.1% of the total fund universe assets under management, up from 5.1% at the end of 2022.
ESG equity funds had a less successful year, with inflows of just $17 billion or 1.2% of AUM, the lowest since 2017. While the inflows were higher than the broader market's 0.1% of AUM, U.S. ESG funds saw $7 billion in outflows, notable due to two large redemptions that were not named in the report.
Japan was the only major region to show higher inflows than 2022 at $2 billion, while Europe and emerging markets had positive flows of $3 billion and $10 billion, respectively, that were lower than previous years.
ESG bond issuance should reach $825 billion in 2024, "relatively consistent with FY22 and FY23E, but well below the 2021 record high," and a key topic will be green bonds that address emissions, Barclays analysts said in the research report on ESG bonds. While corporate and public sector borrowers will still dominate the market, "sovereigns are steadily increasing their market share," they said.
The 8% drop in corporate ESG bond issuance in 2023 was largely caused by fewer U.S. issuers, driven in part by regulatory uncertainty, reputational concerns and costs, the report said. However, the decline in issuance in 2023 is "a slump rather than a symptom of chronic decline, with debut ESG bond issuers continuing to emerge," the analysts said.
