US ESG fund managers see the worst quarterly withdrawals

US fund managers experienced their most challenging quarter on record for ESG-oriented products as client redemptions accelerated. Morningstar’s recent data reveals that withdrawals from US funds dedicated to environmental, social, and governance (ESG) objectives amounted to $8.8 billion in the first quarter of 2024. This stands in stark contrast to Europe, where ESG funds saw inflows of around $11 billion, reflecting the stronger presence of sustainable investing regulations.

This trend underscores a growing aversion among US investors towards ESG strategies, which have faced criticism from prominent Republicans as being politically charged and contrary to American values. Moreover, setbacks in core ESG industries like wind and solar have resulted in lacklustre returns, further discouraging investor interest.

Hortense Bioy, Morningstar’s global director of sustainability research, noted the multitude of challenges facing sustainable funds, including high energy prices, rising interest rates, and a backlash against ESG principles in the US.

The significant redemptions from US ESG funds impacted global inflows, which totaled a modest $900 million in the first quarter. With Japan experiencing outflows of $1.7 billion and minimal changes in the rest of Asia, Australia, and New Zealand, the overall picture reflects cautious investor sentiment amid uncertainty surrounding upcoming elections and their potential impact on green policies.

Despite this, global sustainable fund assets saw a slight uptick of 1.8% last quarter, reaching nearly $3 trillion by the end of March. However, the organic growth rate remained close to zero, highlighting a stagnation compared to the broader fund universe.

Passive investment products continued to gain traction, with BlackRock Inc. maintaining its dominance with $368 billion in sustainable assets, twice the size of its closest European counterpart, Amundi SA.

Morningstar’s analysis focused on open-end funds and exchange-traded funds explicitly designed around sustainability, impact, or ESG criteria.


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