In the fourth quarter of 2024, sustainable funds globally recorded the highest inflows of the year, reaching USD 16.0 billion —a significant increase from the revised USD 9.2 billion recorded in the third quarter. However, net purchases of global sustainable funds shrank by half from 2023 levels. This was in stark contrast to the broader market, which experienced a surge driven by a US stock rally.
Global Fund Flows Over the Years
Global sustainable funds are open-end funds and exchange-traded funds that incorporate environmental, social, and governance criteria into their selection and portfolio management processes across multiple regions, including Europe, the United States, and the rest of the world.
The annual flow exhibit below shows the great volatility of fund flows, or the net movement of cash into and out of funds and ETFs across different regions over time. Inflows into global sustainable funds reached their zenith of USD 645 billion in 2021 when the broader fund market also enjoyed record inflows of over USD 2.4 trillion. In 2022, global sustainable fund flows plunged by 75% but remained positive, while the broader fund market registered outflows against a challenging macro backdrop that included the war in Ukraine, high inflation, and recession fears. For most of 2023, sustainable fund flows remained resilient, except in the US, while the broader fund market slowly recovered.
In 2024, inflows into global sustainable funds shrank by half, while the rest of the fund universe enjoyed a boom and recorded the second-largest subscriptions in seven years, boosted by a US stock rally.
A combination of factors has affected investor appetite for sustainable funds in recent years, including the average underperformance of ESG strategies, greenwashing concerns, regulatory changes, and a growing anti-ESG sentiment in the US.
The lower inflows experienced by sustainable funds in recent years contrast with multiple surveys showing continuous investor interest in sustainable investing. According to a widely watched survey by Morgan Stanley published a year ago, 54% of individual investors planned to increase their sustainable investments in 2024, and 77% were interested in sustainable investing. According to the Voice of the Asset Owner survey conducted by Morningstar Sustainalytics in the first half of last year, investors are increasingly considering ESG factors in their investment decisions. Sixty-one percent of asset owners in North America said that ESG has become more material in the past five years. For most of them, ESG considerations go hand in hand with fulfilling their fiduciary duty.
Assets in Global Sustainable Funds Top USD 3.2 Trillion
Despite reduced fund flows, global sustainable fund assets reached an all-time high of USD 3.2 trillion at the end of 2024, an 8% increase from the previous year and more than quadruple the size in 2018. Europe remains the leading market, housing 84% of the assets. The US fell to 11% in 2024, down from 15% in 2018. The market share of the rest-of-world sustainable funds increased to 2.3% in 2024, up from a negligible 0.7% in 2018.
Europe Is the Leading Market for Sustainable Funds
Europe accounted for the majority of the fourth-quarter inflows into sustainable funds, contributing USD 18.5 billion. This underscores Europe’s pivotal role in the global sustainable fund landscape.
The rebound in the fourth quarter led to an organic growth rate of 0.65%, up from 0.34% in the third quarter. But this remained below the 1.20% organic growth rate of the broader conventional fund universe, which amassed USD 154 billion in flows during the same period.
Sustainable Fund Launches Rise in Europe
The last quarter of 2024 registered a minor uptick in sustainable fund launches in Europe, which rose to 59 from the restated 49 in the previous quarter. Meanwhile, fund closing and rebranding activity gained momentum. Ninety-four sustainable funds closed in the fourth quarter, bringing the total to 351 over the full year.
Through 2024, 213 European sustainable funds changed names, of which 50 added ESG-related terms, 115 dropped ESG-related terms, and 48 swapped ESG-related terms.
The trend of dropping or changing names accelerated in the fourth quarter, as expected, as UK-domiciled funds started complying with the naming and marketing rules of the Financial Conduct Authority’s Sustainability Disclosure Requirements and as funds distributed in the EU started implementing European Securities and Markets Authority’s ESG fund naming guidelines. Both rules aim to protect investors against greenwashing risk.
For more details on the EU ESG fund landscape, click here.
More Outflows for US Sustainable Funds
In the US, redemptions from sustainable funds in the last quarter increased to USD 4.3 billion compared with the USD 2.0 billion outflow registered in the third quarter.
In 2024, ESG investing in the US faced heightened challenges as the politicization of sustainability deepened, driven by growing anti-ESG sentiment and intensified scrutiny under the President Donald Trump administration, exacerbating regulatory uncertainty and tempering investor demand.
During the fourth quarter, assets in US sustainable funds dropped by 2.7%, ending the year at USD 344 billion. However, over the whole of 2024, assets in US sustainable funds rose by 6.3% from the end of 2023, supported by market appreciation.
For more details on the US sustainable funds landscape, click here.
Modest Growth in Asia ex-Japan
Sustainable fund flows in Asia ex-Japan showed modest growth to USD 2.7 billion in the fourth quarter, though the region’s contribution to global assets remained small at 2%.
Sustainable fund assets in Asia ex-Japan grew by 4% in the fourth quarter of 2024, reaching USD 73.7 billion, with Taiwan continuing to account for over one third of the region’s assets.
Thailand saw the largest growth, with its sustainable fund market more than doubling to USD 933 million, driven by strong inflows and new fund launches.
Singapore also experienced significant expansion, with assets increasing by 81%, largely due to the growth of iShares MSCI Asia Ex-Japan Climate Action ETF ICU, which focuses on companies with strong climate-related metrics, attracting major institutional investors.
To check out the full report on the fourth-quarter global ESG fund flows, click here.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
