In the first half of 2023, sustainable funds exhibited a strong performance, outpacing the median return of traditional funds, as per Morgan Stanley. This marked a turnaround from their underperformance in 2022, a shift emphasised in the asset manager’s report titled ‘Sustainable Reality.’ 

“Our mid-year update shows the resilience of ESG funds with a return to outperformance after a challenging 2022…Investors are increasingly turning to sustainable funds with sustainable AUM now at ~8% of total AUM globally,” says Jessica Alsford, Morgan Stanley’s Chief Sustainability Officer and CEO of the Institute for Sustainable Investing.

Furthermore, Morgan Stanley informs that while the total assets under management of sustainable funds in 2023 fell short of the record set in 2021, the trend indicated a continued inclination toward sustainable investments. 

“A rebound in growth stocks helped sustainable funds beat traditional funds in the first half of 2023…,” said the asset manager. According to Alsford, sustainable equity funds delivered the most substantial gains, while the outperformance was less pronounced in fixed-income funds.

Subsequently, she points out that Europe led the adoption of sustainable funds, followed by North America and other regions. Additionally, the asset manager believes that an increase in the use of restriction screening, an approach to limit exposure to certain issuers or activities based on values or regulations, contributed to the growth of sustainable investing. 

“More than 20% of total global AUM now uses at least one restriction screen, a surge from just 2% in 2019. Controversial weapons, thermal coal, and tobacco are the most-used screens,” informs Alsoford.

“One reason for this increase is the EU’s recent Sustainable Finance Disclosure Regulation (SFDR), which sets out mandatory ESG disclosure requirements for asset managers,” she adds. 

In conclusion, Morgan Stanley said that despite potential challenges, sustainable funds are anticipated to see continued growth in AUM, reflecting enduring investor demand for these environmentally and socially responsible investment options.

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