(Bloomberg) -- For the first time ever, ESG funds saw net global outflows amid a major exodus by US investors from environmental, social and governance strategies.
US fund clients withdrew a net $5.1 billion in the final three months of 2023, according to a fresh analysis by Morningstar Inc. published on Thursday. Combined with $1.2 billion in outflows in Japan, that was too severe a retreat for Europe’s $3.3 billion of net inflows to bolster the global market.
In all, the global sustainable fund market experienced net redemptions of $2.5 billion in the fourth quarter, marking an historic low point for the industry. US skepticism toward ESG follows years of attacks by Republicans who accuse the strategy of being “woke” and anti-capitalist. Legislators in New Hampshire have even sought to criminalize ESG. At the same time, investors have started to question the strategy’s staying power, after an extended period of poor financial returns on a relative basis.
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 $21.3 billion of allocations into passive strategies, while actively managed funds lost almost $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.”
Flows into European ESG funds, though still positive, were way below levels seen the previous quarter, when the strategy attracted $11.8 billion in net new money. In the US, meanwhile, the pace of outflows was almost double the $2.7 billion registered in the third quarter.
Much of that development should be seen against the context of persistently high interest rates, fears of a recession as well as anxiety relating to the spread of war, Morningstar said. Even so, redemptions last quarter left a bigger dent in ESG funds than in conventional portfolios, the researcher’s data showed.
Net outflows represented a decline of 0.1% relative to total global sustainable fund assets. For the broader fund universe, net outflows were equivalent to 0.05% of the total, Morningstar said.
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 $3 trillion in total. That increase in value is broadly in line with the wider market, according to Morningstar.
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