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Decline in sustainable fund flows continues amid US investor caution

By Jessica Penny
3 minute read

Two iShares ETFs accounted for half of sustainable fund withdrawals this past quarter, new figures have shown.

Investors pulled a record US$8.7 billion from US sustainable funds in the first quarter of 2024, the latest data from Morningstar has revealed.

This marks the sixth consecutive quarter of outflows from US sustainable funds, underscoring a continued weakness in investor appetite compared to traditional investment vehicles.

Conversely, earlier analysis of the Australasian market by Morningstar paints a more positive picture for the local region, indicating a steady recovery for sustainable funds in Australia and New Zealand.

Namely, sustainable funds in Australia and New Zealand saw inflows of some US$567 million in the fourth quarter of 2023.

According to the research house, positive flows were driven by active strategies which gained US$434 million. In contrast, passive sustainable funds gained US$133 million.

While the precise reasons behind the continued outflows from US sustainable funds cannot be perfectly quantified, Morningstar said attributing factors included high interest rates, moderate returns in 2023, concerns about greenwashing, and the persistent “politicisation” of environmental, social, and governance-focused investing.

Meanwhile, growth in sustainable funds in the US contracted by 3 per cent during the first quarter compared to 1.4 per cent overall growth for US funds. The quarter was also characterised by fund closures outpacing new launches, with only two new sustainable funds introduced compared to the liquidation of 10.

Notably, a majority of the funds discontinued were equity focused, with CCM Core Equity Impact fund QUAGX having amassed nearly US$72 million by the end of January 2024 before its closure.

Active and passive suffer equal losses

Outflows were split almost evenly between actively managed funds and index-tracking counterparts, with both groups shedding more than US$4 billion apiece during the period.

Two iShares passive funds led the charge for outflows, with investors pulling close to US$4 billion from iShares MSCI USA ESG Select ETF SUSA and iShares ESG Aware MSCI USA ETF ESGU during the quarter, coming in first and third, respectively, for losses.

Parnassus came second, with two funds – Parnassus Core Equity PRBLX and Parnassus Mid Cap PARMX – ranking among the worst for first-quarter withdrawals. The duo lost US$2.3 billion together over the first quarter of 2024, according to Morningstar.

“Long known as the largest US sustainable fund, Parnassus Core Equity has been one of the 10 biggest losers in terms of outflows for two years straight, shedding more than US$4.3 billion over that period,” the firm noted.

“Parnassus attributes a portion of the fund’s outflows to the launch of a less expensive collective investment trust and the subsequent conversion of investors from one vehicle to the other.”

On the other side of the coin, the Fidelity US Sustainability Index FITLX, collected more than US$432 million during the period, while the Vanguard FTSE Social Index VFTNX recorded inflows of US$272 million.