Sustainable open-end and exchange-traded funds (ETFs) faced record-high outflows in the first quarter, reflecting the material impact of a global anti-ESG backlash.
Investors pulled an estimated $8.6bn out of sustainability-labelled funds globally, with Europe – historically the largest sustainable fund market – recording its first quarterly outflows since tracking began in 2018, losing $1.2bn, according to Morningstar.
This trend may have been accelerated by regulatory developments, with ESMA’s new rules on sustainability-labelled funds coming into force. Consequently, 335 sustainable products changed names, including 116 that dropped ESG-related terms.
The gloomy picture was replicated across the Atlantic. The United States saw its tenth consecutive quarter of outflows ($6.1bn), while Asia ex-Japan also posted minor net redemptions. Conversely, Canada and Australia/New Zealand bucked the trend with modest inflows of around $300m each.
Hortense Bioy, head of Sustainable Investing Research at Morningstar Sustainalytics, said the latest data pointed to a fundamental shift in the market: "The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned in the market."
"We are seeing further signs of consolidation, rebranding activity, and cautious product development, amid an intensifying ESG backlash in the US, which is now also noticeably affecting sentiment in Europe. Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions," she predicted.
Whilst fund flow data for open-ended listed funds in Europe and the US are gloomy, the picture is more mixed for less liquid private market strategies.
Investors are increasingly repositioning towards transition infrastructure, rather than climate funds, according to the latest PitchBook data. Nevertheless, private equity funds have raised more than $100bn for climate solutions over the past three years, according to PitchBook’s latest sustainable fund flows report.
