Assets in U.S. ESG-oriented funds continued to shrink in the third quarter of 2023, due to increasing withdrawals and poor market performance, a new Morningstar report reveals.
While Morningstar refers to “sustainable funds” in its report, the report defines such funds as those that focus on the three ideological causes that define ESG (Environmental, Social, Governance):
“The U.S. sustainable fund universe encompasses open-end funds and exchange-traded funds that focus on sustainability, impact, or environmental, social, and governance factors (per the prospectus).”
The report notes that the third quarter’s contraction in total sustainable/ESG fund assets extends a long-term trend:
- Investors pulled $2.7 billion from sustainable funds, recording the segment’s fourth consecutive quarter of outflows.
- Sustainable funds shrank at a far higher rate than did the total U.S. funds market (0.85% of assets, vs. 0.02%).
- Assets in sustainable funds fell below $300 billion.
- Investors pulled $14.2 billion from sustainable funds over the past year.
- Both actively-managed and index-tracking funds lost more than $1.2 billion of assets and both have had outflows in five of the past six quarters.
- Sustainable commodity funds have experienced net outflows in every quarter since their debut in the third quarter of 2022.
With demand for sustainable/ESG investments dwindling, the number of new and existing product offerings also decreased in the third quarter:
- Three new sustainable funds launched and one existing fund was added, while 13 sustainable funds closed and four funds abandoned ESG mandates.
- Sustainability-focused product development slowed to its lowest level in three years.
- For “the first time in recent history,” sustainable fund closures and departures exceeded new products.
- The largest sustainable funds to close were products of either Columbia Threadneedle, Hartford, or BlackRock.
Read Morningstar’s full report, “U.S. Sustainable Fund Flows: Q3 2023 in Review”