While sustainable investment funds and ETFs saw record outflows in the first quarter on a global basis, Canada swam against the tide, as one of the few markets with positive flows into sustainable funds, according to a new report from Morningstar DBRS.
In the first three months of the year, investors pulled $8.6 billion (all figures in U.S. dollars) from global sustainable funds, it reported.
The record outflows came “amid new geopolitical challenges and an intensifying environmental, social and governance backlash,” the report noted.
While U.S. investors led the way, with $6.1 billion in quarterly outflows — which marked the 10th straight quarter of negative flows — European investors followed suit for the first time on record, pulling $1.2 billion from sustainable funds.
“Up to last quarter, European sustainable funds had consistently attracted positive quarterly flows,” the report said. “In the past quarter, however, for the first time since at least 2018, European sustainable funds suffered outflows, in contrast with the strong inflows registered by their conventional peers.”
The shift in Europe was attributed, in large part, to the shift in U.S. policy, including new anti-ESG policy measures — such as executive orders against corporate diversity, equity and inclusion (DEI) policies, and its’ newly-hostile approach to addressing climate change.
“For some European investors, the rollback in ESG commitments by U.S. firms has created hesitation, undermining the sense of global alignment on climate and sustainability goals,” it said.
“This hesitation is further compounded by an evolving European regulatory agenda and ESG fund landscape, while persistent performance concerns — particularly in already challenged sectors such as clean energy — continue to weigh on investor appetite for sustainability strategies,” it added.
Despite the shift in Europe, which accounts for the bulk of sustainable investment (accounting for 84% of global assets) one of the few bright spots for the sustainable fund sector was Canada, which recorded net inflows of $285 million in the first quarter.
That represented a “notable uptick,” compared with $52 million in redemptions for the period quarter, Morningstar noted.
In particular, passive funds attracted $445 million, while active funds saw $160 million in quarterly outflows.
“With $247 million of net new money, fixed-income funds attracted the bulk (87%) of the inflows into the Canadian sustainable fund universe in the first quarter,” the report said.
Alongside Canada, Australasia (Australia and New Zealand) was the only other region with positive net flows in the first quarter, according to the report.
Yet, despite the resurgence in net flows for Canadian sustainable funds, assets under management in these funds declined in the first quarter, Morningstar noted — total AUM fell by 0.9% in the quarter to $36.7 billion.
Global sustainable fund assets also slipped in the first quarter, declining 0.7% to $3.16 trillion at the end of the quarter, “reflecting weakness in the U.S. equity market,” it said.