Demand for sustainable funds wanes as Ukraine war puts focus on oil and gas

By Patturaja Murugaboopathy and Simon Jessop

LONDON (Reuters) – Demand for sustainable stock funds waned in February as Russia’s invasion of Ukraine hit investor sentiment and higher gas prices and energy security fears bolstered the appeal of the traditional Oil & Gas sector.

Interest in environmental, social and corporate governance (ESG) issues such as climate change has surged in recent years, leading many investors to avoid the high carbon-emitting energy sector, but this got a boost after the conflict began in late February.

While the STOXX Europe 600 fell 3.4%, the Oil & Gas sector rose 0.8%, buoyed by a 10.8% gain in Brent crude futures and a 15% gain in European natural gas prices.

Equity ESG funds, which make up the bulk of funds focused on sustainable investing, saw a 60% slowdown in inflows to $9.4 billion during the month, Refinitiv data showed, compared with inflows of $24.4 billion in the prior month.

Graphic: Flows into ESG equity funds vs non-ESG equity funds: https://graphics.reuters.com/GLOBAL-MARKETS/byvrjeggnve/chart.png

Total flows across all equity funds, meanwhile, slowed to $56.7 billion from $65.4 billion, for a 13% drop.

“The Russian invasion of Ukraine has put ESG investing on the backfoot, as energy security has taken centre stage over carbon intensity,” said Laith Khalaf, head of investment analysis at AJ Bell Investments.

“Continuing use of coal power, which was unthinkable only a few weeks ago, is now on the agenda across Europe, and the rising price of oil and gas might have persuaded some ESG investors who were in it for the profits, that there may yet be some life left in traditional energy sectors.”

Total assets under management in equity ESG funds stood at $3.2 trillion at the end of February, down 9.3% since the start of the year.

“In the longer term the policy winds are still prevailing in the direction of renewables, but the Ukraine crisis has definitely prompted a recalibration of governmental priorities when it comes to energy,” Khalaf said.

Graphic: Global equity ESG funds’ asset size: https://graphics.reuters.com/GLOBAL-MARKETS/gdpzybxzkvw/chart.png

After posting a record gain of 47% last year, the MSCI World ESG Leaders’ index has fallen 9.8% so far this year to underperform the MSCI World index’s decline of 9.4%.

Otto Christian Kober, director at Refinitiv Lipper, said the negative performance for favoured ESG stocks in February was also due to a rise in geopolitical risks.

“The outlook for investors pouring in new money into these fund types will strongly depend on turning market trends and (an) easing of geopolitical risks,” he said.

Graphic: Flows into global commodity funds: https://graphics.reuters.com/GLOBAL-MARKETS/lgpdwadrbvo/chart.png

(Reporting by Patturaja Murugaboopathy; Editing by Alexandra Hudson)