Sustainable funds market inflows halve as ESG falls out of favour

Inflows to ESG funds smallest since 2018

Traders pull $19.6 bln from US sustainable funds

In Europe, 351 fund closures outpace 235 launches

LONDON, – Cash flowing into world sustainable funds shrank by half in 2024 and in Europe closures of such funds outpaced new launches, as anti-ESG sentiment and subpar returns dulled the attraction of the funding technique, Morningstar Sustainalytics mentioned on Monday.

The funds’ finest quarter for inflows got here on the finish of 2024, the analysis agency mentioned, with $18.5 billion of inflows largely going into passive European funds.

However after preliminary enthusiasm for Environmental, Social and Governance funding, the larger image is that poor efficiency, robust EU regulation and an intense anti-ESG marketing campaign within the U.S. are driving traders and managers away from the asset class, Morningstar Sustainalytics mentioned.

Inflows to world sustainable funds plunged $36 billion final yr, the bottom since 2018, after ballooning to $645 billion in 2021, shrinking by half whereas the traditional funds market, pushed by U.S. shares, loved a growth, the analysts mentioned in a be aware.

Final yr was a very turbulent one for sustainable funds, the analysis firm mentioned, with excessive rates of interest hitting clear vitality and different inexperienced shares and climate-sceptic Donald Trump elected as U.S. president.

In his first few days in workplace, Trump has pushed again in opposition to ESG areas akin to variety and known as for unfettered progress of the U.S. fossil gas business. Many ESG portfolios are underweight in vitality shares due to their emissions profile.

Whereas European sustainable funds nonetheless booked inflows, albeit at a a lot slower tempo than the traditional market, within the U.S., traders pulled $19.6 billion from sustainable funds in 2024, with This autumn marking 9 consecutive quarters of outflows, the information exhibits.

In the meantime in Europe, regulatory efforts to clamp down on greenwashing – false claims made concerning the environmental advantages of funds or property – are seeing asset managers shutter or rename funds or drop ESG mandates.

Some 351 sustainable funds closed or merged in 2024 with a further 115 funds dropping ESG associated phrases. Morningstar expects between 30% and 50% of ESG funds will rebrand by mid-2025 as a consequence of new fund naming and labelling necessities.

The entire variety of sustainable funds tracked by Morningstar in Europe is 5,502 and 621 within the U.S.

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