US sustainable fund flows drop to lowest level in 7 years

A 20% decline in AUM from record high


Laura Miller

Money into US sustainable funds fell to its lowest level in seven years in 2022 after a fossil fuel energy-focused year, according to Morningstar data.

A net total of $3.1bn flowed into the country’s sustainable investments last year, and these funds shed nearly $6.2bn in the final stretch of 2022.

Many sustainable funds limit exposure to traditional energy stocks based on concerns for that sector’s long-term growth prospects. But from a return’s perspective, energy was the only place to be in 2022. 

Rising oil and natural gas prices contributed to the Morningstar US Energy Index’s more than 60% gain during the year, which outperformed all other stock sectors by incredible margins.

However, while sustainable funds continued to see positive, if lower, inflows, in 2022 their conventional peers endured their first calendar year of net outflows since Morningstar began tracking data in 1993. 

Demand for US sustainable funds has fallen steadily since the all-time record $21.5bn intake in 2021′s first quarter.

Total assets landed at $286bn last year, a 20% decline from the all-time high of $358bn at the end of 2021.

Fixed income demand

Passive funds dominated sustainable fund flows again and collected $4.3bn in flows, while actively managed sustainable funds saw outflows.

For the first time on record, fixed income funds commanded the lion’s share of 2022’s sustainable fund flows with a $2.4bn intake. 

Flows into sustainable bond funds surged to three-fourths of overall flows, up from 16% in 2021.

The number of sustainable open-end and exchange-traded funds available to US investors rose to nearly 600 in 2022, up 12% from 2021. 

In 2022, the 87 new sustainable funds topped the number of launches in 2020 but lagged behind the record 121 set in 2021.

Sustainable funds continue to deliver lower levels of ESG risk, compared with peers. At the end of 2022, nearly 70% of sustainable funds received the highest Morningstar Sustainability Ratings, 4 or 5 globes, compared with 27% of funds overall.

The 10 largest sustainable voting funds supported more than 60% of the key ESG resolutions on which they voted in 2022. 

This ranged from 100% support (Parnassus Core Equity and Calvert Equity) to 20% (Vanguard FTSE Social Index).  

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