US sustainable fund outflows accelerate in Q3 but Europe remains resilient

Latest Morningstar update shows sustainable assets fell in value albeit less than traditional counterparts

Global sustainable funds recorded another decline in inflows in the third quarter of the year, with investors backing the sector with $13.7bn compared to a revised $23.6bn in the previous quarter, but sustainable assets fell in value less than traditional counterparts.

Falling stock valuations meant global sustainable fund assets declined by 4.2% to $2.74trn at the end of September, from $2.86trn three months earlier. By comparison, the global mutual fund and ETF market slid by 5%.

The state of US sustainable fund flows was particularly dire in the third quarter. Outflows spiralled to $2.7bn, from the restated $576m in the previous quarter.

This marks the fourth consecutive quarter of net redemptions US ESG funds have suffered, according to Morningstar’s Global Sustainable Fund Flows report.

A possible factor continuing to weigh on US investor demand is the political backlash against sustainable investing in the country, according to Hortense Bioy (pictured), global director of sustainability research for Morningstar and ESG Clarity Committee member. The report also noted a growing number of US fund houses are removing ESG-related terms from their product names.

More broadly, fewer investor assets making their way into sustainable funds partly reflects the uncertain macro environment, according to the report.

Persistent higher inflation, recent interest rate hikes, and ongoing recession concerns in regions including the UK, US and Europe, all continue to dampen investor sentiment.

European funds resilient

Despite the challenging macro backdrop, European sustainable funds remained resilient and attracted $15.3bn of net new money in the third quarter. 

This is down from the revised $25.4bn in the second quarter. Sustainable fund inflows in the last quarter contributed more than two-thirds of the overall European fund flows.

Europe is also not seeing the removal of ESG labels from fund names, as witnessed in the US.

Europe continued to make up the lion’s share of the sustainable fund landscape, with 85% of global sustainable fund assets. It also remains by far the most developed and diverse ESG market, followed by the US, which housed 11% of global sustainable fund assets at the end of September 2023.

Bioy said: “The third quarter was a challenging one again for investors, and sustainability-focused investors were not immune to the gloomy macro environment. 

“Yet, European ESG funds attracted new money again despite a slowdown in product development, greenwashing concerns and the ever-evolving regulatory environment.”

APAC inflows

Other markets registering inflows were Asia ex-Japan, with $2bn of net subscriptions, from the restated $1.3bn three months prior. Asia ex-Japan, of which China is the biggest sustainable market with more than 67% of the region’s asset base, ranks third in terms of sustainable fund market size.

Flows in Australia and New Zealand experienced a minor pickup as the local sustainable funds attracted $30m after bleeding almost $1.7bn in the second quarter.

The slowdown in product development continued, amid greenwashing accusations and regulatory tightening, and fewer funds are adding ESG-related terms to their names in the first place.

An estimated 102 new sustainable funds hit the shelves globally in the third quarter, down from the restated number of 154 launched in the second quarter of 2023. However, the number of 102 will likely also be restated upward in Morningstar’s next report.