Sustainable funds suffered their worst outflow on record in the first quarter as investors globally withdrew a record-breaking $8.6bn throughout the period, according to Morningstar Sustainalytics.
It unravelled the optimism injected in the previous quarter when inflows of $18.1bn signalled glimmers of hope for the sector.
Much of this year’s outflows came from US investors, who withdrew $6.1bn – it’s 10th consecutive quarter of divestment.
Yet more strikingly, it also marked Europe’s first quarter of net outflows since 2018. Investors in the region withdrew $1.2bn throughout the three-month period, in contrast with the strong inflows registered by their conventional peers. Up to last quarter, European sustainable funds had consistently attracted positive quarterly flows, including in the fourth quarter of 2023, when conventional funds experienced redemption.
Launches of sustainable funds in Europe also reached a new low of 47 over the past three months, despite an uptick (75 new funds) seen in the last quarter of 2024. The cooldown in sustainable fund launches in recent quarters compared with previous years “reflects a normalisation of product development activity after three years of high growth”, the report explained.
However, asset managers have also become more cautious in their development of new ESG and sustainable strategies because of greenwashing accusations and uncertainty around regulations. The European Union’s Sustainable Finance Disclosure Regulation is still under review, while asset managers have also been busy assessing the impact of the European Securities and Markets Authority’s fund naming guidelines on their fund ranges, implementing the necessary changes to comply with the new rules.
Analysis
Several interconnected factors help explain this reversal, said head of sustainable investing research, Hortense Bioy. European investors “were likely following US investors”, who pulled back on diversity, equity and inclusion (DEI) commitments as a result of Donald Trump’s anti-ESG agenda.
Market uncertainty caused by the US president’s tariff policies also played a part in their bearishness, she added.
“These developments have prompted asset managers in the US to adopt a more cautious global approach in promoting their ESG credentials and supporting sustainability issues,” Bioy said.
“For some European investors, the rollback in ESG commitments by US firms has created hesitation, undermining the sense of global alignment on climate and sustainability goals. This hesitation is further compounded by an evolving European regulatory agenda and ESG fund landscape, while persistent performance concerns – particularly in already challenged sectors such as clean energy – continue to weigh on investor appetite for sustainability strategies.”
Reacting to the report, Paris Jordan, head of responsible investment at Charles Stanley & Co., said that, given the ties of many European institutions to US business, it makes sense that some cautiousness is undertaken, especially from a legal perspective. However, it is “deeply disappointing” that this has resulted in negative flows rather than a mere slowdown of inflows across the region.
“One reassuring element is that $1.2bn out of Europe is still a relatively small number versus the assets held ($2.7tn) making up 0.04% of assets – thus, context always remains important.
“Sustainability is borne out of a demand to address real world problems which aren’t going away over the long term. Even with European flows ‘going negative’ for the first time in this report’s history, it is important to remember that this negative sentiment is driven by a handful of short-term factors which will alleviate with time.”
She also noted that sustainability has traditionally been enacted via equity funds, while investors have favoured more fixed income in recent times.
“This can be witnessed in the breakdown of European flows, whereby fixed income flows are very positive,” she added. “Should there be greater product offerings in sustainable fixed income, it is possible we would find people turn to these instruments during times of broader macro uncertainty.”
This article originally appeared in our sister publication, Portfolio Adviser
