ESG mandated US funds posted $9B outflows in Q1

US fund managers suffered their worst-ever quarter for ESG-focused products as the pace of client redemptions intensified.

Client withdrawals from US funds targeting environmental, social and governance goals reached $8.8 billion in the first three months of 2024, according to fresh data compiled by Morningstar Inc. That stood in stark contrast to the roughly $11 billion of inflows into ESG funds in Europe, where sustainable investing regulations are far more entrenched.

It’s the latest sign that US investors are turning their backs on the investment strategy, which has been targeted by high-profile Republicans as woke and anti-American in its design. At the same time, many core ESG industries such as wind and solar have suffered setbacks, leading to poor returns and further alienating many investors.

“Sustainable funds have been facing many headwinds in the past couple of years, including elevated energy prices, high interest rates and an ESG backlash in the US,” said Hortense Bioy, global director of sustainability research at Morningstar. 

The scale of redemptions from US ESG funds dragged down global inflows, which were a modest $900 million in the first quarter, Morningstar said. Japan had $1.7 billion of outflows, while the rest of Asia, as well as Australia and New Zealand, saw little to no change. 

The development comes as investors wait to see how elections across the globe affect green policies that are likely to impact ESG investment strategies. In the US, Donald Trump and President Joe Biden are polling neck-and-neck. And in Europe, European Parliament elections are likely to give parties that have voiced skepticism toward green policies a bigger foothold in the bloc’s legislature.

The global development reflects “caution ahead of key elections in the US and Europe which will determine the pace of future green policies and encourage or discourage more sustainable practices,” Bioy said.

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