For the first time ever, ESG funds saw global net outflows amid a major exodus by US investors from environmental, social and governance strategies.
US fund clients withdrew a net US$5.1 billion ($6.8 billion) in the final three months of 2023, according to a fresh analysis by Morningstar Inc. published on Thursday. Combined with US$1.2 billion in outflows in Japan, that was too severe a retreat for Europe’s US$3.3 billion of net inflows to bolster the global market.
In all, the global sustainable fund market experienced net redemptions of US$2.5 billion in the fourth quarter, marking an historic low point for the industry. US scepticism toward ESG follows years of attacks by Republicans, with legislators in New Hampshire even seeking to criminalise the practice. At the same time, investors have started to question the strategy’s staying power, after an extended period of poor financial returns.
The retreat from ESG also lies in the failure of actively managed strategies to draw in clients, according to Morningstar’s analysis. Even in Europe, fund flows were buoyed by US$21.3 billion of allocations into passive strategies, while actively managed funds lost almost US$18 billion.
The “disappointing reality is that active managers failed again to prevent redemptions in a corner of the market where it’s easier for them to prove their worth,” Hortense Bioy, global director of sustainability research at Morningstar, said in the report. “By contrast, passive funds demonstrated consistent resilience.”
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The outlook is far from hopeless, though, according to Bioy.
“The global ESG fund flow picture in the last quarter may look bleak, but ESG funds in Europe – by far the largest market - continued to hold up better than the rest of the fund universe,” she said. She also noted that the value of global ESG fund assets continued to rise, gaining 8% to US$3 trillion in total.
The retreat from ESG unfolded as “the broader market of open-end funds and exchange-traded funds also suffered redemptions against a continuously challenging macroeconomic and geopolitical backdrop,” Morningstar said.
