Green transition: US sustainable fund losing streak extends to 4 quarters
Sustainable funds tied to the green transition are on a losing streak.
Investors withdrew $2.7 billion from funds focused on environmental, social, and governance (ESG) factors in the third quarter, according to a new report from Morningstar. It's the fourth straight quarter these funds saw negative net outflows.
"There have always been multiple drivers of motivation for investors and sustainability-focused funds, some of which I think we would expect to be more durable than others," Alyssa Stankiewicz, associate director of sustainability research at Morningstar and the report's author, told Yahoo Finance. "Perhaps rising energy prices and broader global macroeconomic events over the past year and a half have weakened the rationale for keeping those in the portfolio if you're looking specifically at performance drivers."
A political backlash against ESG investing — which combines risk factors from carbon emissions to corporate governance to labor disputes under one framework — also didn't help sentiment.
Although investors pulled money from traditional funds as well, the outflows were more significant among those with sustainable labels. Overall US long-term funds contracted by $3.9 billion during the third quarter, representing a mere 0.02% decline. Sustainable funds, meanwhile, fell by 0.85%.
Furthermore, more sustainable funds closed in the third quarter than were opened — the first time this has happened in recent history. Three new sustainable funds were launched during the quarter while 17 others either closed or removed their sustainable mandates, as investors turned their focus to other themes such as options trading, emerging markets, and artificial intelligence.
The decline in sustainable funds and beaten-down clean energy stocks has been especially stark given the boom in the space between the end of 2020 and the beginning of 2022. Assets in sustainable funds fell to $298.8 billion in Q3 of this year, down 17% from the record $358.2 billion in Q1 2021.
The passage of President Biden's landmark climate law over a year ago, which has begun delivering substantial investment in the green transition, was expected to provide another tailwind for clean energy stocks. But some of that optimism has faltered in recent quarters.
"We haven't necessarily seen that play out, which is a bit of a surprise," Stankiewicz said about the expected investment boost from the law.
A few funds have been especially hard-hit. The passively managed iShares ESG Aware MSCI USA ETF (ESGU) and the actively managed Parnassus Core Equity fund (PRBLX) saw the greatest outflows of their kind, losing roughly $2.1 billion and $600.7 million, respectively, during the quarter. The largest climate fund, the iShares Global Clean Energy ETF (ICLN), has also struggled, losing more than $794.2 million this year.
Nevertheless, there were pockets in the sustainable fund landscape that continued to see demand.
US sustainable bond funds netted positive flows for the third straight quarter, drawing in $639.3 million, as the Fed strengthened its commitment to a "higher for longer" policy stance for interest rates.
And while the appetite for ESG has been shaken, there continued to be demand for climate-specific funds focused on specialized areas such as clean energy.
Globally, climate funds pegged to the green transition grew by 30% to $534 billion from the beginning of 2022 through June of this year, according to Morningstar, though demand for these funds in the US lagged that in Europe and China.
"Climate funds definitely have seen stronger demand than the broader sustainable funds landscape in the US," Stankiewicz said. "2022 was certainly not as strong, but it was positive. So we're definitely seeing more consistent demand for those funds."
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