Dive Brief:
- Investors pulled $2.7 billion in assets from the sustainable fund market in Q3, research firm Morningstar reported Monday. The firm said investors showed a significant decline in interest for sustainable funds “amid rising energy prices” and “concerns about greenwashing and political backlash.”
- The bulk of the attrition can be attributed to a single fund, BlackRock’s iShares ESG Aware MSCI USA ETF, which accounts for $2.1 billion of the outflows. However, the broader market also saw contraction, with 13 fund closures in the quarter compared to just three new launches.
- Though the market increased 10% year-over-year, it marks the fourth straight quarter that the sector saw more funds pulled than invested.
Dive Insight:
The sustainable funds market has seen a 17% decline in assets since a sector-record $350 billion in assets in 2021’s Q4. Given how fast the market grew — doubling in assets and funds over the past few years — the last few quarters of slowdown point to the sustainable fund market beginning to reach maturity, according to Morningstar Associate Director of Sustainability Research Alyssa Stankiewicz, the report’s author.
Stankiewicz said she attributes part of the growth and subsequent tapering of sustainable fund investments to the differing motivations behind why people invest in the sector.
“[S]ome investors in sustainable funds do so because they have a personal connection to and conviction in the issues that sustainable funds are trying to address. Others may use sustainable funds to outperform the market at different points in time,” Stankiewicz said in an email to ESG Dive.
“I expect that the first group of high-conviction sustainability-oriented investors isn't going anywhere. … The second group may allocate to sustainable funds for a period of time before moving that allocation in light of market projections,” she added.
The report found that the sector’s losses were spread fairly evenly between active and passive funds. The decline of BlackRock’s fund, however, pushed the passive market into the negative. Without the losses of this fund, sustainable passive funds would have seen minor growth.
In the active fund market, a Parnassus equity fund saw losses of over $600.7 million, representing more than half the sector’s losses. It’s been eight straight quarters of decline for the fund.
The largest sustainable funds to close this year were run by Columbia Threadneedle, Hartford and a pair from BlackRock. The funds had been on the market for eight, two and three years, respectively and collectively had over $55 million assets under management. The three new launches are the fewest to open during any quarter over the past three years.
Despite all the signs of decreasing demand, the total number of U.S. funds has increased 11% since the beginning of 2023, up to 661 funds at the end of September. Additionally, one product saw an increase in investments: sustainable bonds. Fixed income offerings saw their third straight quarter of growth, with $639.3 million investments in the quarter.
The report concluded with a look at the impending regulatory updates: While Morningstar expects the Securities and Exchange Commission’s proposed rule from March 2022, which would require funds that use ESG as a criteria to explain their processes, to be announced by the end of the calendar year, the timeline of the agency’s climate disclosure rule is less clear.
SEC Chair Gary Gensler’s September testimony before the House Financial Services Committee indicated the agency is still reviewing the more than 15,000 comments it received on the proposal. Gensler told the committee that the agency is also considering changes to the proposed rule as a part of that process.
“The SEC has no role as to climate risk itself,” Gensler said. “We, however, do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face.
