The launch of new sustainable investment funds slowed globally in the first quarter of 2024, according to market data from industry analytics firms. Asset managers are reducing new offerings and closing existing products amid investor withdrawals, recent underperformance of such funds, and increased regulatory examination of environmental, social, and governance (ESG) claims.
Data from Morningstar shows that 129 new sustainable funds were launched globally in the first quarter of 2024. This figure represents a significant decrease from the market’s peak, when 786 new funds were launched in the third quarter of 2021.
The trend coincides with investors withdrawing capital from the sector. Morningstar reported net outflows of $9 billion from sustainable funds globally during the first quarter, marking the second consecutive quarter of net withdrawals from these products.
In Europe, the number of fund liquidations surpassed new launches for the first time on record, according to data from LSEG Lipper. The firm reported that 114 ESG-focused funds were liquidated in the first quarter, while 66 were launched.
Several factors have been cited by market analysts for the shift. Hortense Bioy, global director of sustainability research at Morningstar, attributed the trend in part to the underperformance of some sustainable strategies in an environment of higher interest rates, which has impacted sectors like technology and growth stocks often favored by ESG funds.
Increased regulatory oversight has also influenced the market. In the European Union, the Sustainable Finance Disclosure Regulation (SFDR) has established stricter classification and reporting standards for funds making sustainability claims. In the United States, the Securities and Exchange Commission (SEC) has implemented rules to ensure fund names accurately reflect their investment strategies, a measure intended to provide greater clarity for investors.
Detlef Glow, head of EMEA research at LSEG Lipper, stated that the European fund industry is undergoing a “clean-up” of its product range in response to these regulatory pressures and changing market demand. This process involves asset managers reassessing their existing funds to ensure compliance and discontinuing products that no longer align with new standards or investor interest.
