ESG Inflows Slowed Globally in 2Q Amid Backlash

Sustainable funds pulled in $18 billion, as total assets reach $2.8 trillion, Morningstar says.

Inflows into global ESG funds and ETFs fell 42% in the second quarter as rising interest rates, high inflation and recession fears combined with the political backlash against sustainable investing in the U.S. to dampen enthusiasm for the products.  

Sustainable fund inflows fell to about $18 billion from $31 billion from the first quarter, according to Morningstar Inc.’s latest sustainable funds report. Still, ESG assets reached almost $2.8 trillion at the end of the second quarter—close to the all-time high of $3 trillion in 2021.  

ESG funds still fared better than funds in general during the second quarter. Globally, funds saw outflows of $37 billion, compared to inflows of $77 billion in the previous quarter.  

In the U.S. specifically, sustainable funds lost $635 million this past quarter, which was an improvement from the overall $5 billion lost in the previous two quarters. In the past year, investors have drawn $11.4 billion from U.S.-based sustainable funds. The report cites market volatility, as well as “the political backlash against sustainable investing in the U.S.,” according to authors of the report. 

“There are more ETFs in the U.S. than there are in in Europe, but the trend in Europe is still positive for passive funds in ETFs in general, in particular because of the low cost and the innovations we’re seeing in indexing when it comes to ESG strategy,” Hortense Bioy, Morningstar UK’s global director of sustainability research, said in an interview. 

iShares ESG ETFs 

The iShares Climate Conscious & Transition MSCI USA ETF (USCL) and the Xtrackers MSCI USA Climate Action Equity ETF (USCA) led the way in inflows for sustainably focused ETFs, with each netting more than $2 billion.  

The iShares ESG Aware MSCI USA ETF (ESGU) was the biggest loser in the period, seeing about $2.3 billion in outflows. The Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), another passively managed ESG fund, lost about $2.1 billion.  

Sustainable bond ETFs saw their second quarter of consecutive inflows, Morningstar noted. Yet the inflows to bond funds were relatively modest, with only $288 million drawn to the assets globally.  

Flows into funds based in Asia, excluding Japan and China, reached about $172 million. The top five funds to see inflows in the category were all ETFs: the SOL Secondary Battery Materials & Equipment, TIGER Secondary Cell, KODEX Secondary Battery Industry, KBSTAR Secondary Cell Active and the KODEX ESG Korea Total Bond Market Active.  

In Canada, inflows into sustainable funds and ETFs decelerated by about $1 billion—down to $207 million. “The net inflows were attributed to active strategies as passive registered small outflows,” the report stated.  

Contact Lucy Brewster at [email protected]