Sustainable investing

After rebounding to start the year, sustainable fund flows in Canada slowed again in the second quarter, confirming a general decline in investor appetite for the funds since they boomed during the Covid-19 pandemic.

Canadian sustainable funds and ETFs gathered US$207 million in the second quarter of 2023, according to a report from Morningstar Inc., down from almost US$1 billion in the first quarter (all figures are in U.S. dollars).

All the Q2 gains went to fixed-income funds, which brought in $270 million, while equity funds saw outflows. Active funds accounted for all the inflows, with passive funds seeing redemptions.

However, equity funds continue to dominate the sustainable fund space, accounting for 71% of assets compared to 23% for fixed income, with allocation funds making up the rest.

Active funds account for almost $30 billion of the $33.7 billion in total sustainable fund assets, the report said.

Beginning in the fourth quarter of 2020, sustainable funds posted seven consecutive quarters with flows surpassing $1 billion in Canada — peaking above $4 billion in the first quarter of 2021 — before losing steam in the second half of last year.

Morningstar noted sustainable funds’ organic growth rate declined sharply in the most recent quarter to 0.6% from 3.2% in Q1 2023.

“This aligns with the broader trend seen across various markets in the second quarter as investors witnessed accelerated outflows in the Canadian market during this time,” the report said.

The Investment Funds Institute of Canada reported this week that mutual fund net redemptions totalled $12.8 billion in the first half of 2023, while ETFs brought in $18.4 billion.

While overall sustainable fund inflows lagged, sales were concentrated among a small group of funds: the top 10 funds by net inflows brought in almost $1 billion in the quarter, Morningstar said. National Bank Investments Inc. funds were the top performers, with the NBI Sustainable Canadian Bond ETF collecting $302 million.

As for new products, Morningstar reported six sustainable fund launches in Q2, the same as in the previous quarter but down from the same period a year ago.

“[T]he appetite for product launches has been relatively lower for both sustainable and traditional investment products in the past year,” it said.