ESG | February 8, 2021

Tale of two markets: Public-markets ESG funds roar, private-market impact funds struggle

Jessica Pothering
ImpactAlpha Editor

Jessica Pothering

ImpactAlpha, Feb. 8 – Investors continue to pour billions into sustainability-themed stock funds, making “ESG” one of the hottest trends in asset management. But new private impact funds worldwide raised just €10 billion (about $12 billion) last year – less than 30% of the capital raised by new funds in 2019, according to Phenix Capital’s 2021 Impact Fund Universe report.

With a global pandemic, an economic emergency, a climate crisis and a mass mobilization for racial justice, 2020 should have been the year impact investors turned on the tap (see, “The 10x challenge: Pandemic is a chance for impact investors to step up by an order of magnitude”). It wasn’t. Fewer new impact funds launched in 2020 than 2019 and those that did faced strong headwinds.

Amsterdam-based Phenix reports that 621 impact funds are currently in the market, seeking to raise a combined €125 billion ($150 billion). There’s no sugar coating it: 2020 was a bad year for private-markets impact fundraising.

Public market inflows

The fundraising picture was reversed for publicly traded environmental, social and governance, or ESG, and sustainability funds. Investors poured a record $20.5 billion into sustainability and ESG funds during the final three months of 2020, double the previous record for a quarter, according to Morningstar.

For all of last year, net inflows hit $51 billion, more than double the total for 2019 and nearly 10 times more than in 2018. A separate tally from Sustainable Research and Analysis found that total net assets in sustainable exchange-traded funds, or ETFs, hit $93.1 billion at the end of 2020, up 176% from $33.7 billion at the end of 2019. The driver: outperformance.

Fewer and slower

Phenix tracked data from 1,600 public and private impact funds. Investor skittishness affected fundraising early in the year as the pandemic took hold and the shutdown of roadshows made it difficult for managers to meet with potential investors. “In impact investing, there are a lot of younger fund managers who don’t have a fully established investor base, and for them to be unable to travel and hold meetings makes it really difficult to raise capital,” Phenix’s Dirk Meuleman told ImpactAlpha.

Emerging market funds took a particular hit, attracting only 10% of commitments last year, down from 15% in 2019. “In the second half of 2021 and next year, there will definitely be people looking to make up for lost time,” said Meuleman.

SDG shift

Alignment to the U.N. Sustainable Development Goals has become a popular way for impact fund managers to convey their impact priorities. In 2020, the top three priorities shifted to affordable and clean energy (No. 7), sustainable cities and communities (No. 11), and health and wellbeing (No. 3).

Since 2015, funds targeting climate action (No. 13), affordable and clean energy (No. 7) and industry, innovation and infrastructure (No. 9) have raised the most capital.

Impact alpha

Public impact funds that aim to go beyond negative and ESG screening to contribute to actual solutions have outperformed benchmarks through the pandemic. Mid- and large-cap impact funds did especially well, beating their benchmarks by between 3.4 to 4.4 percentage points over six-month and one-year time periods, Phenix reported.

The second half of the year saw an explosion of green and sustainable IPOs, mostly via special purpose acquisition companies, or SPACs. In an MSCI survey of asset owners representing a total $18 trillion, 73% planned to increase their ESG investments in 2021.