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(Bloomberg) — Funds with ESG investment goals saw $84 billion in outflows last year, marking the first time the global market for such products was hit by net redemptions, according to a report by Morningstar Inc.
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The historic pullback coincides with the first ever net withdrawals in Europe from products claiming to take environmental, social and governance factors into account, the report showed. In the US, meanwhile, ESG funds lost client money for a third consecutive year, Morningstar said on Wednesday.
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“The wider environment remains challenging, as persistent headwinds, including geopolitical tensions, the ESG backlash, regulatory backpedaling, and mixed performance, continue to weigh on investor appetite,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in a statement.
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US President Donald Trump’s explicit anti-environment agenda weighed heavily on the theme while regulatory uncertainty led to many funds dropping ESG labels in Europe. And concerns about greenwashing remain for many investments.
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Fund outflows in Europe, by far the largest region for ESG investing, reached a net $20 billion last quarter as large UK institutional investors reallocated from pooled ESG funds into bespoke ESG mandates, Morningstar said. The hedge fund industry is also lobbying hard to ensure the UK excludes it from new climate regulations.
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Passive ESG funds registered their first-ever annual outflows, losing close to $35 billion. Actively managed funds faced withdrawals of $49 billion, even as their non-ESG counterparts saw inflows.
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The global retreat from ESG-labeled funds comes despite significant gains in clean energy stocks, with sales of green debt also hitting a record high. The S&P Global Clean Energy Transition Index soared more than 43% last year, with Jefferies Financial Group Inc. insisting that green investors are entering the “glory days” for such allocations.
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Green stock gains offset some of the capital outflows, and global sustainable fund assets rose about 4% in the fourth quarter to $3.9 trillion, Morningstar said.
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