ESG building blocks / Maxxa_Satori

U.S. sustainable investment funds continued to bleed assets in the third quarter, according to new data from Morningstar.

The fund research firm reported that investors pulled approximately US$2.7 billion from sustainable funds in the third quarter, marking the fourth straight quarter of redemptions.

“The broader universe of U.S. funds also lost nearly US$3.9 billion, but the relative decline in demand was more significant for sustainable funds,” the report noted.

The combination of negative net flows and poor market performance saw sustainable fund assets decline to below US$298.8 billion, it said.

This pullback from the sector, which amounted to US$14.2 billion over the past year, was driven by “factors such as rising energy prices, high interest rates, concerns about greenwashing, and political backlash,” the firm said.

The one bright spot for the sector was sustainable bond funds, which managed to generate nearly US$639.3 million in new money in the third quarter “as investors sought to lock in attractive yields,” the report said.

For the third consecutive quarter, sustainable bond funds were the only recipients of net new money, the report said, while sustainable equity funds saw a fourth-straight quarter of outflows.

“Affected funds range from diversified offerings that minimize environmental and social risks to more concentrated strategies in renewable energy or electric vehicles,” it said.

Despite the negative flows, the number of sustainable funds has grown by 11% in 2023, the report said, although new product launches “slowed significantly” in the third quarter.

“Fewer new funds launched than at any point in the past three years,” Morningstar reported.

“For the first time in recent history, sustainable fund closures and departures (funds moving away from ESG mandates) outpaced new products,” it added.