By Cole Horton
(Reuters) – The number of asset management firms that incorporate environmental, social and governance (ESG) criteria into their fixed income investments rose significantly over the past year, the Index Industry Association reported on Thursday.
Currently 76% of managers implement ESG within fixed income, up from 42% in 2021, according to the not-for-profit association’s survey of 300 investment management firms in the United States and Europe.
That exceeds the 74% of firms that incorporate ESG in equities, up from 53% in 2021, the association said.
The rapid adoption in fixed income reflects both managers’ improved ability to assess ESG signals in the asset class and investors’ eagerness to diversify beyond ESG equity funds, which command the lion’s share of assets with sustainability characteristics, Index Industry Association CEO Rick Redding said in an interview.
“If you want to invest along certain principles, or philosophies, or your social mores, why wouldn’t you include all asset classes that you can?” Redding asked.
After a years-long boom in new deposits, flows into ESG funds have moderated this year amid the onset of a bear market. [L2N2WV15V]
But the slowdown has been less pronounced for fixed income than equity funds.
U.S. sustainable fixed income funds attracted $9.8 billion in net new deposits during the year ended June 30, down slightly from the $10.6 billion they gathered the year before, according to Morningstar Direct data.
By contrast, net flows into U.S. sustainable equity funds dropped sharply from $59.1 billion to $29.9 billion over the same period, Morningstar said.
Despite the recent softening of inflows, managers’ projections for ESG growth have accelerated since last year.
Firms expect that 40% of their portfolios will include ESG elements in the next 12 months, up 13 percentage points from the 2021 survey, the Index Industry Association said.
(Reporting by Cole Horton in New York; Editing by Will Dunham)
