- Global outflows from sustainable funds registered for the first time
- The sector held up better in Europe but investors snubbed active sustainable managers
Investors pulled $2.5bn (£2bn) from ‘green’ funds around the world between October and December 2023, according to Morningstar Direct data. It was the first time on record that quarterly flows into sustainable funds fell into negative territory.
Morningstar analysts noted that this was in the context of the broader market of both open-ended funds and ETFs suffering redemptions against “a continuously challenging macroeconomic and geopolitical backdrop”. In total, investors withdrew $17bn from global funds and ETFs.
“High interest rates and looming recession among some of the world’s largest economies weighed on investor sentiment along with the escalation of global geopolitical risks from the Israel-Hamas war,” the analysts said. Total flows in sustainable funds were still positive for the whole of 2023 at $63bn, but this marked a significant decrease on the previous year’s $161bn.
The outflows were chiefly registered in the US, where investors withdrew $5.1bn from sustainable funds. In Europe, the biggest market for these investments, the picture looked more nuanced.
European investors put $3.3bn in sustainable funds over the quarter, down from $11.8bn in the previous quarter but still in positive territory. Sustainable funds in Europe also fared better than their conventional counterparts, which bled $25.4bn in the last three months of the year. But sustainable inflows went into passive strategies, which gathered $21.3bn. For active sustainable managers in Europe, it was the second quarter of outflows in a row at $18bn, an increase from $4.8bn of outflows between July and September.
As we recently reported, ETF flows were strong in Europe in the last quarter of the year, and, together with the stock market’s rally, they pushed assets invested in ETFs to a record level.
Morningstar analysts said a range of factors contributed to the lower inflows into sustainable funds in Europe last year. “It is fair to assume that some investors took a more cautious approach to ESG investing last year in the wake of the underperformance of ESG and sustainable strategies in 2022, partly due to their typical underweight in traditional energy companies and overweight in technology and other growth sectors,” they said. If the technology sector rebounded in 2023, other popular sectors in sustainable strategies continued to underperform, particularly renewable energy.
Additionally, high interest rates and recession fears have pushed investors towards government bonds, an area where there are limited sustainable options. Greenwashing concerns and the ever-evolving regulatory environment were also factors at play, the analysts added.
