US sustainable fund outflows continue amid ‘political contention’

Outflows from US sustainable funds reached $19.6bn in 2024 as anti-ESG sentiment grew

For the second year in a row, US sustainable funds saw outflows in 2024, losing $19.6bn compared with $13.3bn in 2023, says a report by environmental, social and governance analytics company Morningstar Sustainalytics. 2024 marks the largest outflow from US sustainable funds since Morningstar began tracking them in 2015.

Sustainable funds reversed the trend of the overall market with investors adding $740bn to conventional funds in 2024, the report adds.

ESG investing remained “at the centre of political contention” in the US in 2024, says Morningstar Sustainalytics. But this was not the only factor behind the outflows, said Hortense Bioy, the organisation’s head of sustainable investing research, in a statement. “Continuously high interest rates, greenwashing concerns, and a general preference for conventional strategies in a bull market”, also contributed, according to Bioy.

Passive and active funds followed the trend, but actively managed funds saw larger outflows ($16bn) than passive funds such as index funds ($3.6bn), with the biggest US sustainable funds seeing the largest outflows.

For the first year since 2015, the number of sustainable funds on offer to US investors shrank. Numbers fell to 587 at the end of 2024 from 646 at the end of 2023. 

Only 10 new funds were launched in 2024, compared with more than 100 a year in 2021 and 2022, the report says. Meanwhile, 71 sustainable funds were either merged or liquidated in 2024, and 24 dropped their ESG-focused mandate.

Nonetheless, despite the outflows in 2024, assets that remained in sustainable funds saw annual growth of 6.3 per cent to $344bn in 2024. This is an increase from $323.5bn of total assets in 2023 but a 6 per cent decrease from their all-time high in 2021 ($365.7bn), which the report attributes to market price appreciation.

The assets within US sustainable funds are more than five times larger than 10 years ago, the report adds.

Investors must look beyond ESG labels 

Elsewhere, a report by investment analytics company Scientific Portfolio has urged sustainable investors to look beyond the labels of ESG funds and instead focus on the specific holdings within a portfolio.

The research analysed “harms” done to the UN’s Sustainable Development Goals by conventional investment funds and compared them with sustainable funds. While conventional funds generally did more harm to goals such as good health and well-being; peace, justice and strong institutions; and life below water, some ESG-labelled funds showed similar levels of harm to their conventional counterparts.

In the US, an average of 11 per cent of holdings in conventional investment portfolios did harm to the UN SDGs, meanwhile for ESG-labelled funds this was 5.3 per cent on average. 

The Morningstar Sustainalytics report is available here and the Scientific Portfolio report is available here.