Sustainable funds continue to see withdrawals in Q2, but the outflow is drying up

Investors continued to pull money from U.S. sustainable equity funds in the second quarter of 2024, but the outflows slowed markedly from the pace of withdrawals in the first three months of the year, financial information firm Morningstar reported this week.

The $4.7 billion second-quarter outflow was the seventh consecutive quarter of outflows. But that represented just about half of the first quarter total of almost $9 billion, Morningstar said.

ESG bond funds, on the other hand, maintained some positive momentum with inflows of $320 million, down from $868 million in the first quarter.

“Although the motivations behind outflows cannot be precisely quantified, several key factors contribute to this trend,” Morningstar analysts wrote in a story on the company’s website. Among them:

• High interest rates, which have made alternative investment options more appealing and diminish the attractiveness of sustainable funds.
• Mediocre returns of sustainable funds in 2023 have led to investor dissatisfaction and subsequent withdrawals.
• Concerns about greenwashing have also contributed to reduced investor confidence, as skepticism grows regarding the genuine sustainability credentials of some funds.
• The increasing politicization and regulatory scrutiny of ESG investing have prompted some investors to reevaluate their positions, resulting in further outflows.

Active ESG funds experienced outflows of $3.7 billion in the second quarter, which is $1 billion less than the redemptions recorded in the previous quarter. Similarly, outflows from index-tracking products slid to $960 million from the restated $4.3 billion of outflows in the first quarter.

Comparatively, the overall U.S. market of funds posted lower organic growth of 0.3% in the past three months, after expanding by 0.7% in the first quarter of the year. (Quarterly organic growth is calculated by dividing quarterly flows by assets at the beginning of the quarter.)

Largest sustainable fund outflows

Largest sustainable funds inflows

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