Sustainable fund inflows halve in 2024 as ESG faces global backlash

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Global sustainable fund inflows fell by 50% in 2024, with European fund closures outpacing new launches, as weak returns and growing opposition to ESG investing dampened enthusiasm, according to Morningstar Sustainalytics.

Sustainable funds worldwide attracted just $36 billion in inflows last year, marking the lowest level since 2018 and a steep decline from the $645 billion peak in 2021. In contrast, conventional funds, buoyed by US stock market performance, experienced strong growth.

The best quarter for ESG fund inflows came at the end of 2024, with $18.5 billion invested, primarily in passive European funds. However, overall enthusiasm for ESG investing has waned due to underwhelming returns, tighter EU regulations, and rising political opposition, particularly in the United States.

2024 proved turbulent for ESG funds. High interest rates negatively impacted green stocks, including clean energy companies, while the re-election of Donald Trump as U.S. president intensified anti-ESG sentiment. Trump’s administration has already reversed ESG-related policies and promoted the expansion of the fossil fuel industry. Many ESG funds, underweight in energy stocks due to their emissions profiles, suffered as a result.

In the US, ESG funds recorded $19.6 billion in outflows in 2024, marking nine consecutive quarters of withdrawals. Meanwhile, European ESG funds saw some inflows, but at a much slower pace than conventional funds.

Stricter EU regulations targeting greenwashing—misleading claims about the environmental benefits of funds—are driving closures, mergers, and rebranding efforts among asset managers. Morningstar reported that 351 sustainable funds in Europe were closed or merged in 2024, with an additional 115 funds dropping ESG-related terms.

The tightening of fund naming and labelling requirements is expected to result in the rebranding of 30% to 50% of ESG funds by mid-2025, according to Morningstar.

Morningstar tracks 5,502 sustainable funds in Europe and 621 in the US, reflecting the greater prevalence of ESG investing in the EU compared to the American market.

Analysts attribute the decline in ESG investments to a combination of poor returns, regulatory challenges, and political headwinds. While some European ESG funds continue to attract investors, the global outlook for sustainable investing remains uncertain as asset managers adapt to changing conditions.

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