Sustainable investing-focused mutual funds and exchange-traded funds suffered a severe beating in 2024, producing record outflows, a record number of discontinued ESG mandates and a record number of fund closings via merger or liquidation, according to Morningstar.
The culprits for these results were poor performance relative to conventional peers, high interest rates, a political backlash against environmental, social and governance investing, and greenwashing, the practice by corporations whose ESG public-relations efforts exceed their ESG actions.
“The outflows experienced by U.S. sustainable funds in the past couple of years contrast with surveys showing continuous investor interest in sustainable investing,” said the Jan. 16 report by Morningstar Sustainalytics, a unit of Morningstar, which issues annual analyses of ESG investing activity.
However, the report noted that actions speak louder than words, at least when it comes to asset managers. Outflows fell to $19.6 billion last year vs. outflows of $13.3 billion in 2023.
“High interest rates continued to penalize some areas of the market, such as clean energy stocks and other growth stocks,” the report said. “Only 42% of sustainable funds (were) in the top half of their respective Morningstar categories.”
Only 10 sustainable funds were launched last year, well below 2023 when 66 were launched and far behind the glory years of 2021 and 2022 when 116 and 103 funds, respectively, entered the market.
“The abrupt slowdown in product development can be directly explained by lower investor demand for new sustainable strategies in the ongoing ESG backlash context,” the report said.
Also last year, 71 sustainable funds were either merged or liquidated, while 24 dropped their ESG-focused mandate, the report said.
Both were records, representing the first time that fund closures and the dropping of ESG mandates exceeded new launches.
Last year also represented the first time the number of sustainable funds declined from a previous year. There were 587 open-end mutual funds and exchange-traded funds last year, down 9% from 2023’s record year.