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Flows to European ESG exchange traded funds halve in first quarter

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European investor allocations to environmental, social and governance exchange traded funds slowed down in the first quarter of 2024 as the sector endures an “existential crisis”, Morningstar research shows.

Net flows into ESG ETFs totalled €7.1bn in the first quarter, down from €13.8bn in the previous three-month period.

ESG sales represented 16 per cent of total ETF inflows during the quarter, compared with 29 per cent in the previous period, the research found.

“This means further deceleration from the highs of 2022 when close to 65 per cent of all flows into the European ETF market were directed to ESG-themed strategies,” said Jose Garcia-Zarate, associate director of passive strategies at Morningstar.

ESG investing “appears to be going through a period of existential crisis as flows, while still positive in absolute terms, dwindle as a proportion of total flows, particularly within equity”, Garcia-Zarate added.

While the ESG ETF flows and assets situation in Europe remained “on positive ground . . . in absolute terms”, it would be “unwise to negate that some investors have become concerned about the underperformance of the ESG investments in the last couple of years”.

Sales of ESG equity ETFs in the first quarter amounted to €4.1bn, a sharp decline on the €12.5bn collected in the previous quarter.

“Another sign of concern is that this has been a period where growth equity strategies have outperformed value-focused peers,” Morningstar says.

“ESG equity propositions tend to be heavy in growth stocks, which begs the question of why they have not been able to benefit from the tailwind in terms of flows.”

However, overall sales of European ETFs remained on a steady course in early 2024.

European ETFs and exchange traded commodities gathered €44.5bn of net new money in the first three months of the year, a slight decrease on the €47.4bn attracted in the last quarter of 2023.

Flows into equity ETFs totalled €36.8bn during the period, a slight increase on the previous quarter, signalling investors were keen to continue riding the rally in global equity markets, particularly the US, Morningstar says.

But fixed income ETF flows fell from €14.1bn in the last quarter of 2023 to €8.8bn of net inflows in the first quarter of 2024.

“The once steady stream into bond ETFs witnessed a slowdown, reflecting investor recalibration of rate-cut expectations,” says Garcia-Zarate.

At the end of March, assets under management in European ETFs stood at €1.81tn, up 10 per cent on the previous quarter.

BlackRock’s iShares arm topped the quarterly flows league with €14.1bn of net sales, ahead of DWS’s Xtrackers business and Amundi, which respectively attracted €8bn and €5bn of net new money.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.

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