Patturaja Muraboopathy 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.

In recent years there has been a surge in interest in ESG issues like climate change. This led many investors to steer clear of high-carbon-emitting sectors such as the energy sector. However, this trend picked up after the February conflict.

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

The bulk of ESG-focused funds that are focused on sustainability investing saw an inflow slowdown of 60% to $9.4 Billion in September, according to Refinitiv data. This is compared to the $24.4 billion of inflows in March.

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

The total flows from equity funds slowed down to $56.7 billion, from $65.4 billion. This is a decrease of 13%.

Laith Khlaf, head for investment analysis at AJ Bell Investments, stated that the Russian invasion in Ukraine had put ESG investments on the backfoot.

The continued use of coal power is possible, something that was impossible just a few weeks back, but the rise in oil prices might have convinced some ESG investors, who had been in it to make a profit, that traditional energy sector may still be viable.

The total assets under management of equity ESG funds was $3.2 trillion as of February 31, which is 9.3% lower than the beginning of the year.

Khalaf explained that although policy winds continue to favor renewables over the medium term, Khalaf noted that the Ukraine crisis has forced a reexamination of government priorities in energy.

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

The MSCI World ESG Leaders’ Index posted a record 47% gain last year but has now fallen to 9.8%, which is below the 9.4% decline.

Refinitiv Lipper’s director Otto Christian Kober stated that February’s negative performance in favoured ESG stocks was also due geopolitical uncertainties.

“The prospects for investors pumping new money into these type of fund types will heavily depend on turning markets trends and (an ) easing geopolitical dangers,” he stated.

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