Asset managers in Europe and the US have spent 2024 winding down hundreds of ESG funds, as the investment strategy continues to bump up against regulatory headwinds.
In the third quarter alone, European investment firms liquidated or merged 102 funds touting sustainable goals, bringing the total to 349 this year, according to a Morningstar Inc. analysis of the market published on Thursday.
That puts 2024 on track to surpass last year’s 351 ESG fund closures in Europe. In the US, 12 funds were liquidated, including five managed by BlackRock Inc. And more upheaval is likely to be ahead, as new rules designed to crack down on misleading ESG sales pitches get rolled out, Morningstar said.
“We expect changes to the universe of sustainable funds to intensify in the coming months ahead of looming deadlines for new anti-greenwashing regulations, including the EU’s fund-naming rules,” the authors of the report wrote.
At the same time, Morningstar noted that redemptions from funds touting environmental, social and governance metrics slowed in the US, while inflows into European ESG funds declined. And given Europe’s dominant size in the market for ESG investing, signs of a retreat in the region carry significance.
“The global flow picture for ESG funds is improving, but it hides nuances across geographies,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in a statement. Notably, “net inflows into ESG funds aren’t increasing in Europe, the leading market,” she said.
Bioy pointed to a number of factors behind the development, including a smaller universe of funds due to the pace of liquidations. But she also noted that fund managers are gripped by a level of “uncertainty around anti-greenwashing rules” and how these, as they evolve, will impact existing and future ESG strategies.
Such concerns coincided with flows into index-tracking ESG funds sinking to a record low of $10 billion in Europe, Morningstar said. Actively managed ESG funds, meanwhile, saw their first net inflows in five quarters.
Globally, ESG funds drew new client money equivalent to $10.4 billion in the third quarter, up from $6.3 billion in the previous three-month period. In Europe, which sits on more than 80% of the world’s ESG fund assets, inflows fell to $10.3 billion from $11.1 billion.
In the US, the pace of redemptions slowed to $2.3 billion, compared with outflows of $4.7 billion in the second quarter. ESG fund managers in Japan also saw a decline in the pace of outflows, while the rest of Asia continued to attract new money to funds carrying the label, Morningstar found.
ESG funds underperformed the broader market. The segment’s organic growth rate — defined as net flows relative to total assets — was 0.33% for ESG funds, compared with 0.77% for the wider market, Morningstar said.
In all, the global market for ESG funds now holds assets equivalent to close to $3.3 trillion, spread across roughly 7,600 funds.
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