ESG investors prefer passive as active funds ‘bleed money’

investmentnews.com:

A long-held truism of ESG is being challenged, namely the idea that the strategy is best-suited to active fund management.

For 11 of the past 12 quarters, clients have redeemed cash from actively managed funds registered as “promoting” environmental, social and governance goals, otherwise known as Article 8 under European Union regulations. The data, provided by Morningstar Inc., indicates a recalibration is underway in an investing form that from the get-go was supposed to favor the active selection and de-selection of assets.

As active ESG funds “bleed money,” Morningstar’s global director of sustainability research, Hortense Bioy, says the managers overseeing such portfolios are now “licking their wounds.” Meanwhile, “passive ESG investments continue to appeal to more investors,” she said in a report published on Tuesday.

While active strategies still dominate ESG investing in absolute terms, a rapid adjustment appears to be underway with Morningstar estimating that almost 15% of the EU’s strictest ESG fund category, Article 9, is now passive. Just over 5% of such funds were passively managed in December 2022, Morningstar reported last May. A similar trend is playing out in the Article 8 market, which is much larger than Article 9 but subject to laxer disclosure rules.

Meanwhile, Morningstar’s global ESG fund management study — published last week — also shows passive strategies gaining ground. And the world’s uncontested leader in ESG products is BlackRock Inc., “thanks to its passive offering,” according to Morningstar. At the same time, actively managed funds saw a third consecutive quarter of outflows globally, the researcher said. 

 The biggest Article 9 product at the end of the first quarter was the