Making sense of a tough quarter for ESG funds | USAEMALL.com

Welcome back. Have sustainable investment funds had their day? Some might be tempted to draw that conclusion from a weak new set of data — but they’d be getting rather carried away, as I explain below.

Sustainable investing

A poor quarter for green funds — in context

The latest figures are in for the sustainability-focused fund sector, and they ain’t pretty.

Morningstar data showed record-high global net outflows of $8.6bn from these funds in the first three months of this year. Most ominously, even Europe — by far the most important region for this kind of fund — saw negative flows, for the first time since Morningstar started tracking this data in 2018.

But while the go-go days may be over for this section of the investment world — at least for now — it’s important to keep a sense of perspective.

Firstly, this was, to put it mildly, an unusual quarter. Even the most gung-ho green investor could be forgiven for wavering in the weeks following Donald Trump’s return to the White House, which pushed sustainable investing strategies into a new level of uncertainty.

True, flows into sustainable funds have been slipping since the peak year of 2021, when they enjoyed $645bn of net inflows. Last year, they suffered weaker flows than the wider fund market for the first time in Morningstar’s record. But they still attracted net positive flows — including $18.1bn in the last three months of 2024, more than double this quarter’s deficit.

Also true: these funds achieved positive flows last year only thanks to Europe. In the US, money has been flowing out of them since late 2022. Flows were negative last year in Japan and China, too. But Europe has been by far the biggest driver of activity in this space all along. Even at the end of 2021, before the US flows turned negative, Europe accounted for 81 per cent of sustainable fund assets; the US, just 13 per cent.

The simple fact that this fund sector has suffered its first quarter of negative flows in Europe is clearly a landmark worth noting. But the amount of money involved is barely significant. European sustainable funds suffered $1.2bn of net outflows — just 0.04 per cent of their $2.68tn in assets at the start of the quarter.

Meanwhile, sustainable fund flows remain positive this year in mid-sized markets including Canada, Australia, South Korea and Taiwan. An all-out global rout this is not.

The headline numbers, meanwhile, mask significant differences in the figures for various sorts of “sustainable” funds (the Morningstar data includes all kinds of funds that claim to focus on sustainability, impact or environmental, social and governance factors). While equity funds still make up the bulk of this sector, sustainable fixed-income funds have been enjoying consistently strong net inflows — including $14bn in this quarter — as the green bond market continues to grow.

By the end of this year, we’ll have a better picture of the medium-term trajectory of this sector. Its recent investment performance offers some grounds for bullishness. Despite the outflows, sustainable funds appear to have held their aggregate asset value slightly better than the wider market amid the turmoil of the first quarter, with their total assets contracting by 0.7 per cent, against a 1.4 per cent decline for the Morningstar Global Market index.

None of this is to deny the serious challenges that this sector faces, particularly in the US. But with more than $3tn under their management, these funds are now an established and important feature of the global investment landscape. It will take much worse quarters than this one to change that.

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