Asset managers in Europe and the United States have been winding down hundreds of ESG funds throughout 2024 as the investment strategy faces increasing regulatory challenges. In just the third quarter, European investment firms liquidated or merged 102 funds marketed with sustainable goals, reaching a total of 349 ESG fund closures this year, according to a recent analysis by Morningstar Inc.
This puts 2024 on track to exceed last year’s total of 351 ESG fund closures in Europe. In the US, 12 such funds were liquidated, including five managed by BlackRock Inc., with expectations of further disruption as new anti-greenwashing regulations come into effect, Morningstar indicated.
“We expect changes to the universe of sustainable funds to intensify in the coming months ahead of looming deadlines for new anti-greenwashing regulations, including the EU’s fund-naming rules,” the authors of the report wrote.
Meanwhile, redemptions from US ESG funds slowed, while inflows into European ESG funds declined, a trend significant given Europe’s dominant market share in ESG investing.
“The global flow picture for ESG funds is improving, but it hides nuances across geographies,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in a statement. Notably, “net inflows into ESG funds aren’t increasing in Europe, the leading market,” she said.
Bioy attributed this to factors such as a shrinking fund universe due to liquidations and the uncertainty fund managers face around evolving anti-greenwashing regulations.
These pressures align with a record low of $10 billion in flows into index-tracking ESG funds in Europe, Morningstar reported, though actively managed ESG funds experienced their first net inflows in five quarters.
Globally, ESG funds attracted $10.4 billion in new client money during the third quarter, up from $6.3 billion in the previous period. However, in Europe, ESG inflows slipped from $11.1 billion to $10.3 billion. In the U.S., the pace of redemptions slowed to $2.3 billion from $4.7 billion in the prior quarter, while ESG funds in Japan saw reduced outflows, and the rest of Asia attracted new investments in ESG-labeled funds.
However, ESG funds underperformed the broader market, with an organic growth rate of 0.33%, compared to 0.77% for the overall market, Morningstar said. Globally, ESG funds now account for approximately $3.3 trillion in assets, spread across roughly 7,600 funds.