Updated with correction.
U.S. sustainable funds had their worst calendar year in 2023, according to Morningstar, which has been tracking them for more than a decade.
Investors pulled $13 billion from U.S. sustainable funds in 2023, including $5 billion in the fourth quarter alone, due to a combination of lagging performance, politics and one iShares fund's bad year.
Despite that, sustainable fund assets reached $323 billion at the end of the year, an 18% increase from a 2022 low but a 12% drop from a 2021 record. Sustainable funds contracted by 1.7% in the final quarter of 2023, compared to 0.2% growth for U.S. funds overall, Morningstar analyst Alyssa Stankiewicz said in a Jan. 17 preview of an annual look of sustainable funds.
Actively managed funds accounted for roughly 90% of net withdrawals from all sustainable funds, while one passive sustainable fund, iShares ESG Aware MSCI USA ETF ESGU, saw investors pull more than $9 billion during the year, following BlackRock's first-quarter change to target-allocation ETF model portfolios that largely replaced the ETF. Without that move, sustainable passive funds would have netted more than $1 billion, Morningstar said.
The only slightly good news for U.S. sustainable funds was that 2023 was better than 2022, when net annual inflows that averaged $47 billion the previous three years sank to $3.1 billion. All types of U.S. funds had a rough 2022, with more than $370 billion in withdrawals, Morningstar said.
Returns for U.S. sustainable funds rebounded from 2022, with the median sustainable large-blend equity fund gaining 24.4% in 2023. That narrowed the gap with all types of funds that gained 23.9% last year.
And, despite the outflows and lagging conventional peers, market appreciation helped to boost sustainable fund assets higher by the end of 2023, Morningstar found, although 32% of sustainable equity funds dropped to the bottom quartile relative to peers.
The fourth quarter of 2023 saw the launch of seven new sustainable funds and liquidation of 16 sustainable funds, including emerging-markets debt strategies from BlackRock.
After April 17, investors will no longer have a Morningstar tool to help them understand asset managers ESG ambitions. In a Jan. 17 email to investors, Morningstar said the ESG Commitment Level assessment introduced in 2020 is being retired, "due to forthcoming changes in the regulatory environment."
The assessment of how 108 asset managers globally incorporate ESG factors into their investment processes was intended to simplify the selection process for sustainability-focused investors. The qualitative assessments ranked managers as leaders, advanced, basic and low in terms of ESG commitment.
