NEW YORK: The global market for sustainable funds just suffered its worst quarter on record with redemptions reaching an all-time high, according to a fresh analysis by financial-services company Morningstar Inc.
Against a backdrop of “geopolitical uncertainty and a growing backlash against environmental, social and governance (ESG) goals,” investors withdrew an estimated US$8.6bil in the first quarter of this year, Morningstar said yesterday.
The development marks a “stark reversal” from the US$18.1bil in inflows in the final quarter of last year, it said.
Even in Europe, which is by far the world’s biggest market for investments targeting ESG, ESG funds saw net outflows, with redemptions of US$1.2bil.
The first-quarter withdrawals mark the first time European ESG funds have lost money since Morningstar started monitoring the market in 2018.
Overall, the ESG fund market is struggling to find its footing amid an “increasingly complex geopolitical environment” triggered by President Donald Trump’s return to office, the researcher said.
“The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned in the market,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in an email accompanying the report.
“We’re seeing further signs of consolidation, rebranding activity, and cautious product development, amid an intensifying ESG backlash in the United States, which is now also noticeably affecting sentiment in Europe,” Bioy said. “Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions.”
Asset managers based in the United States are increasingly toning down references to ESG in response to Trump’s attacks on climate-change initiatives and due to legal risks following his executive order targeting diversity, equity and inclusion, Morningstar said.
The development has led some European investors to question US asset managers’ commitment to climate and sustainability goals.
Meanwhile, market regulators in Europe have been cracking down on inflated ESG claims with new investment requirements being put in place in both the European Union and Britain.
The offering of new ESG funds continued to slide in the quarter, with a record low of 54 new funds launched worldwide, Morningstar said.
Meanwhile, the number of funds dropping ESG-related terms from their names roughly doubled, to 116. A further 114 were either liquidated or merged, with US fund closures hitting a record high of 20.
“Funds that struggle to attract assets or deliver good returns are increasingly prone to closing down,” Morningstar said in its report. “We view this as a natural evolution of the industry.”
Canada, Australia and New Zealand marked a rare bright spot, with each seeing inflows of around US$300mil, Morningstar said.
The global ESG fund market had assets worth US$3.2 trillion in the first quarter, it said. — Bloomberg
