Welcome to RBC’s Markets in Motion podcast, recorded April 21th, 2021. I’m Sara Mahaffy, ESG Strategist at RBC Capital Markets and I’m excited to be guest hosting the podcast this week. Please listen to the end of this podcast for important disclaimers.
This week I’ll be guest hosting the podcast and highlighting some of our recent work around ESG fund flows, valuations, and momentum. The three big points you need to know: (1) following a strong surge in 2020, ESG fund flows have eased back the last couple of months. (2) The recent pause in ESG flows is keeping us on guard for better valuation opportunities in ESG leaders, which are starting to look more reasonable vs. recent history in certain sectors. (3) The REITs sector moved up the rankings in our ESG momentum analysis this month.
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Now, the details.
Key point #1, Sustainable Fund Flows Have Eased Back In February& March
- Dedicated sustainable equity funds saw net inflows hit another new record in 1Q. However, within the quarter, net flows hit their high in January and eased back in February & March.
- This does not change our longer term, positive view on the shift towards sustainable investing.
- But in the near term we think that weaker YTD fund performance track records and strong inflows into Value funds may have dampened sustainable fund flows recently.
- Digging down into specific themes, most categories have seen inflows ease back, though clean energy focused funds have seen the biggest deceleration recently.
- In terms of bright spots, themes that saw inflows pick up in March included low carbon, sustainable agriculture & food, ageing population, and health & well-being focused funds.
The 2nd key point I want to highlight is on valuations for ESG leaders.
- After a strong 2020, most of the ESG leaders baskets that we track have underperformed in 2021, keeping us on guard for better valuation opportunities in ESG leaders.
- In our latest report, we have introduced a new ESG valuation heat map, where we highlight where ESG leaders look attractive or expensive relative to recent history within US and European Large Cap sectors.
- While we don’t yet see deeply compelling valuation opportunities for ESG leaders in any sector, they are starting to look more reasonable vs. recent history within Utilities, Industrials, Health Care, and Consumer in both US & European Large Cap sectors.
- We also ran this analysis within US SMID – within US SMID, valuations for ESG leaders look more reasonable vs. recent history within Health Care, Financials, Staples and Tech.
The last point I wanted to highlight is that the REITs sector moved up the rankings in our ESG momentum analysis this month.
- Within the S&P 500 index, the Real Estate sector moved up the ESG momentum rankings in April, which looks at sectors which have seen the most improvement in ESG recently, leveraging data from Sustainalytics.
- Within the REITs sector, most subindustries have seen improvement recently, but the Specialized REITs subindustry has been the biggest driver.
- When we analyze sustainable fund positioning in sectors, the broader Real Estate sector has been a neutral in actively managed sustainable funds. But Improving ESG scores could help improve their standing.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.