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The hot environmental, social and governance (ESG) investment market appears to have gone off the boil with two pieces of news last week highlighting a relative cooling-off period for the sector – in retail at least.
As reported by Reuters, Morningstar is on track to lay off more than 200 staff at its ESG research subsidiary, Sustainalytics, signaling a downturn in demand for the specialist services amid increasing competition.
Morningstar confirmed it would slash the Sustainalytics global staff numbers by up to 12 per cent, the Reuters report says, implying almost 220 jobs could go from the current workforce of more than 1,800.
In June this year, the research house announced plans to “more closely align” the ESG unit with its broader index business, Reuters says, citing a previous email from Morningstar spokesperson, Sarah Wirth.
“As a part of this alignment, we are in the process of making adjustments to strengthen the financial footing of the business,” Wirth said. “We remain committed to growing our ESG capabilities and will continue to invest in this area going forward.”
The Chicago-headquartered Morningstar took a 40 per cent stake in Sustainalytics in 2017 before acquiring full ownership three years later.
At the same time, managed fund networking service, Calastone, reported a mass exodus of almost £1 billion (NZ$2 billion) from ESG investment products in the UK over August.
The Calastone data shows UK investors sold down £953 million from ESG funds in the month, bringing the total outflows from the sector since May to £2 billion.
Edward Glyn, Calastone head of global markets, said in a statement: “The move out of ESG funds has gathered pace in a remarkable reversal after the boom in recent years. Four months of outflows signals a new trend emerging that fund houses will have to work hard to counteract.”
A Morningstar report published this February also showed flows into US sustainable-labelled funds slumped to a 15-year low of just US$3 billion in 2022 from a high of US$70 billion the previous year.
However, the wider US fund market suffered net outflows of US$370 billion in 2022, Morningstar found, during a sustained market drawdown.
The research house report also shows the number of sustainable funds in the US grew by 87 last year to reach almost 600.
Institutional demand for ESG and sustainable investment also appears to be holding up following the launch of a new MSCI service last week.
The MSCI Sustainability Institute would tap into the index provider’s “experience and expertise in the investment industry to spur collaboration across finance, academia, government, NGOs, think tanks and companies from different sectors, while helping to close the gaps between strategy-setting data, analysis, policy and action”, according to a release.
Linda-Eling Lee has shifted from MSCI head of global ESG and climate research to lead the new sustainability think-tank.
Lee said in a release the Institute would help develop “new ways to measure both financial and non-financial value” in collaboration with a wide range of stakeholders.
“Together, we will deepen knowledge of how capital markets can help drive sustainable value,” she said.
Recently appointed MSCI special adviser to the chief executive, Hiromichi Mizuno, would also help with the Sustainability Institute, the release says.
Mizuno was previously chief investment officer of the US$1.4 trillion Japan Government Pension Investment Fund – the largest fund of its kind in the world.
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