In a notable shift, BlackRock Inc. has, for the first time in over 3 1/2 years, faced net client withdrawals from its European ESG funds, indicating a retreat from passive ESG investment strategies, as revealed by a new Morningstar Direct analysis.
Investors withdrew $2.2 billion net from BlackRock’s European-domiciled sustainable open-ended and exchange-traded funds during the third quarter, Morningstar data shows. These calculations, reflecting Morningstar’s definition of sustainability, span 14 quarters since Europe’s ESG disclosure requirements began. This trend marks a shift for BlackRock, historically a leader in ESG fund inflows. “It’s surprising to see these outflows, especially in passive funds that have typically attracted strong interest,” said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
Globally, however, BlackRock’s third-quarter sustainable fund flows remained positive, with over $25 billion in inflows in Europe when including institutional mandates, according to a BlackRock spokesperson who noted the strong momentum across its sustainable platform.
Morningstar data also highlights a broader dip in European index-tracking ESG fund inflows, which fell to a record low of $10 billion by the end of September. In the US, ESG investing has faced resistance, with BlackRock’s CEO Larry Fink vocal about the politicisation of ESG. Now, Europe — home to over 80% of global ESG fund assets — appears to be encountering similar pressures, with net ESG fund inflows across the region’s asset managers dropping more than 7% last quarter.
This cooling demand aligns with investor uncertainty around returns and evolving regulations, such as the European Securities and Markets Authority’s product-naming rules, which could prompt changes across thousands of ESG funds. Bioy noted that clean-energy strategies and ESG-enhanced ETFs under the EU’s climate-transition benchmark (CTB) within BlackRock’s portfolio were particularly impacted by last quarter’s outflows.
Bioy suggested it’s too early to determine if this shift signals a long-term trend for BlackRock or merely reflects increased market volatility. Despite this, climate-transition benchmarks have continued to attract inflows, albeit at a slower rate compared to recent years, Bioy added.
A Bloomberg review of ESG equity funds showed they underperformed relative to the broader market, with average returns of 15% this year versus 19% for the MSCI World Index. Additionally, ESG funds saw an organic growth rate of 0.33% last quarter, compared to the broader market’s 0.77%, Morningstar data indicated.
Morningstar also reported that BlackRock clients withdrew $2.4 billion from its passive open-ended funds and ETFs in the quarter, along with an additional $700 million from iShares ETFs, while its active funds gained $930 million. As a result, BlackRock no longer ranks among Europe’s top 10 asset managers by quarterly ESG inflows, though it remains the region’s largest ESG investment firm.
The BlackRock spokesperson emphasised that factoring in institutional mandates the firm’s “sustainable platform crossed $1 trillion” in assets under management by the end of September, reflecting continued client alignment with BlackRock’s sustainable investment strategies.
