US Fund Managers With ESG Mandates Have Worst-Ever Outflows

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(Bloomberg) — US fund managers suffered their worst-ever quarter for ESG-focused products as the pace of client redemptions intensified.

Client withdrawals from US funds targeting environmental, social and governance goals reached $8.8 billion in the first three months of 2024, according to fresh data compiled by Morningstar Inc. That stood in stark contrast to the roughly $11 billion of inflows into ESG funds in Europe, where sustainable investing regulations are far more entrenched.

It’s the latest sign that US investors are turning their backs on the investment strategy, which has been targeted by high-profile Republicans as “woke” and anti-American in its design. At the same time, many core ESG industries such as wind and solar have suffered setbacks, leading to poor returns and further alienating many investors.

“Sustainable funds have been facing many headwinds in the past couple of years, including elevated energy prices, high interest rates and an ESG backlash in the US,” said Hortense Bioy, global director of sustainability research at Morningstar.

The scale of redemptions from US ESG funds dragged down global inflows, which were a modest $900 million in the first quarter, Morningstar said. Japan had $1.7 billion of outflows, while the rest of Asia, as well as Australia and New Zealand, saw little to no change.

The development comes as investors wait to see how elections across the globe affect green policies that are likely to impact ESG investment strategies. In the US, Donald Trump and President Joe Biden are polling neck-and-neck. On the other side of the Atlantic, European Parliament elections are likely to give parties that have voiced skepticism toward green policies a bigger foothold in the bloc’s legislature.

The global development reflects “caution ahead of key elections in the US and Europe which will determine the pace of future green policies and encourage or discourage more sustainable practices,” Bioy said.

When taking stock price gains into account, global sustainable fund assets rose 1.8% last quarter to just under $3 trillion at the end of March. The organic growth rate, however, was close to zero, compared with growth of 0.5% in the broader funds universe, according to Morningstar.

Passive products continued to gain ground, and BlackRock Inc, the world’s largest money manager, maintained its lead. Its $368 billion in sustainable assets are roughly twice those of Amundi SA, the biggest investment manager in Europe.

The market researcher looked at open-end funds and exchange-traded funds that, by prospectus or other regulatory filings, claim to focus on sustainability; impact; or environmental, social, and governance factors.

(Adds details on passive funds in penultimate paragraph.)

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