Inflow slowdown drags Australian Ethical lower

The recent selloff of richly-valued and speculative stocks is giving Australian Ethical Investment (ASX: AEF) a run for its money. 

The company's stock is rolling over, already down -17.3% this year to a 3-month low.

This follows a 165% gain in 2021.

‘Dirty’ stocks outperform

Investors typically associate ESG with themes such as recycling, renewable energy, net-zero emissions and biodiversity. 

Stocks that fall under these themes are typically very expensive and at times, loss making in nature. 

The US Federal Reserve's intentions to hike interest rates and shrink its US$9tn balance sheet has triggered a global selloff of expensive and risky assets, notably the technology sector.

ESG-themed stocks have been rocked amid this pivot, with global ETFs such as the Inveso Solar ETF and Global X CleanTech ETF both down more than 40% from February 2021 highs.

At the same time, stocks in 'dirty' industries such as coal and oil have outperformed.

Fund flow slowdown casts doubt over growth

The Financial Times reported that ESG fund flows have slowed across major regions including the US and Europe. 

Source: Financial Times, Morningstar Direct

In Europe, ESG funds’ inflows fell from US$149bn in the first three months of 2021 to US$108bn in the third quarter. 

Similarly, American ESG funds hit record highs of US$22.6bn in the first quarter before sliding to US$15.7bn by the third quarter.

Australian Ethical has said multiple times that "if we execute well, we believe it is possible to grow our business [funds under management] 3-5 times over the next few years".

The global slowdown in ESG funds growth does not meld well with this growth narrative.

One could argue that Australian Ethical is priced-to-perfection, trading at more than 120 times FY21 earnings.

With the playing field now working against Australian Ethical's growth ambitions, a swift rerate appears to be underway.

AEF 1-yr chart with 200-day moving average