US Sustainable Funds Face Outflows in 2024 Amid Political Backlash

The U.S. Sustainable Funds Market in 2024

There has been an increased withdrawal from sustainable funds in the U.S. in 2024 due to rising interest rates, faltering performance, and negative political sentiment. Morningstar, the financial information company, reported that $19.6 billion was withdrawn from U.S. sustainable open-end and exchange-traded funds last year, a decrease from the previous year. Meanwhile, conventional funds saw a significant increase in inflows, with an expected interest-rate cut and an AI stock rally supporting this trend. More details can be found in this article on the Morningstar website.

Challenges Faced by Sustainable Funds

According to Morningstar, sustainable funds faced several challenges in 2024. High interest rates proved detrimental to certain market areas, such as clean energy stocks and other growth stocks. In addition, sustainable funds continued to underperform compared to their conventional counterparts, with only 42% of them achieving a position in the top half of their respective Morningstar categories.

Performance of Stock vs Fixed-Income Sustainable Funds

Stock funds did not perform as well as fixed-income sustainable funds, with only 38% of them landing in the top half of their respective categories compared to 48% for sustainable fixed-income funds. Despite these difficulties, sustainable investments had a commendable year, with large-blend equity funds achieving a median return of 20.7% in 2024, although this was slightly lower than the 21.5% median gain for conventional funds, and considerably lower than the 24.1% gain for the overall Morningstar U.S. Market Index.

Impact of Political Climate on U.S. Sustainable Funds

The political climate also affected U.S. sustainable funds, with heightened political scrutiny and backlash against environmental, social, and governance (ESG) investing. This led to some states taking legal action to restrict the incorporation of ESG criteria into investment decisions. Consequently, for the first time, more funds closed or dropped their ESG mandates than were launched, resulting in a contraction of the U.S. sustainable funds market.

New Sustainable Funds in 2024

Only 10 new sustainable funds were launched in 2024, while 71 were either merged or liquidated, and 24 dropped their ESG-focused mandates. This resulted in a 9% decrease in sustainable open-end funds and ETFs from the previous year. Notably, the Invesco MSCI North America Climate ETF and Invesco MSCI Global Climate 500 ETF collected over $4 billion in combined assets by the end of 2024. These ETFs invest in companies leading in carbon reduction and climate-focused business practices.

The KraneShares Sustainable Ultra Short Duration Index ETF was the third-largest new offering, with $224 million in assets at the end of 2024. This fund invests in investment-grade corporate bonds from issuers committed to net-zero emissions by 2050 while excluding companies involved in fossil fuels and unsustainable activities.

Outlook for Sustainable Funds

Despite the outflows of 2024, assets in sustainable funds rose to $344 billion, supported by market price appreciation. This signifies a 6.3% annual growth, despite a 6.0% decline from the record seen at the end of 2021. Actively managed funds continue to dominate the sustainable fund landscape, but low-cost passive funds are rapidly gaining popularity, holding over 40% of U.S. sustainable fund assets at the end of 2024.

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