ESG and sustainable funds saw outflows globally of around £2bn (€2.3bn) in the last quarter of 2023, making it the first time net flows fell into negative territory.
That is according to Morningstar’s latest global ESG flow report, which highlighted the shift in investor mood towards ESG.
Investor interest for ESG appears to have waned amid a continuously challenging macroeconomic and geopolitical backdrop. Global sustainable funds still managed to attract £49bn in 2023, despite this.
All is not lost however, according to one Morningstar chief.
“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. Global ESG fund assets kept rising too,” said Hortense Bioy, global director of sustainability research at Morningstar.
Her comment comes as investors pulled a record £3.9bn from US sustainable funds in the last quarter, for a total of £10bn over 2023, according to the report.
“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.” Bioy observed.
Looking again to Europe, sustainable funds held up better than the broader market and attracted £2.3bn of net new money in the fourth quarter, thanks to passive funds, which collected £16.3bn. Actively managed sustainable funds, however, bled close to £14bn.
Mixed economic backdrop
Global sustainable fund assets rose by 8.2% to £2.3bn at the end of the fourth quarter, from the restated £2trn three months earlier, against a mixed macroeconomic backdrop. Including the end of a rate-tightening cycle, artificial intelligence (AI) boom, as well as rising geopolitical risks and fears of recession among some of the major world economies.
Despite the AI boom and tech rebound – something which was mostly driven by the performance of the ‘magnificent seven’ – which refers to how the fortunes of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla had an integral impact on both the US and global stock market. Sustainable funds had a mixed performance.
That is according to a separate Morningstar report authored by Robert Edwards, director of product management, EMEA and ESG Indexes at Morningstar.
When less-carbon intensive sectors like technology and communication services outperform, market dynamics are typically more favourable for investments centred around ESG factors.
However, the top-heavy nature of global equity market returns in 2023 led to disjointed performance for sustainability indexes, as many missed out on certain members of the ‘magnificent seven’, according to Edwards.