May 2, 2024 - Business

Americans cash out of sustainable funds

Data: Morningstar; Chart: Axios Visuals

U.S. sustainable investment funds, including ETFs, suffered their worst-ever exodus in Q1. They saw $8.8 billion in net outflows, per new data from Morningstar.

Why it matters: That outflow stands in stark contrast to consistent inflows through the first quarter of 2022 and to the continued net inflows to sustainable funds outside the U.S.

  • Sustainable funds are defined by Morningstar as open-end funds and ETFs that focus on sustainability; impact; or ESG factors.

Follow the money: Europe saw $10.9 billion in net inflows in the first quarter of this year — down significantly from a high of $133 billion in the fourth quarter of 2021, but still positive.

The big picture: Europe is home to the overwhelming majority of the world's $3 trillion in sustainable funds, accounting for more than $2.5 trillion of the total.

  • That's up 37% from when we last checked in on these funds in mid-2021. Meanwhile, even after investment gains, U.S. sustainable funds' assets under management are up by less than 12% since Q1 2021, to $335 billion in total.

Between the lines: When interest rates rise, that makes the future less valuable compared to the present. That's bad news for ESG investments, which broadly seek to bet on a brighter, greener future rather than on next quarter's cash flows.

  • "The continued politicization of ESG investing" also played a role in pushing Americans out of the asset class, notes Morningstar.

The bottom line: In the U.S., sustainable investing seems to have missed its moment.

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