Investors withdrew roughly $30 billion from climate-focused mutual funds in 2024, marking the first year since at least 2019 that outflows exceeded inflows. This decline follows a four-year boom and is attributed to challenging economic conditions and uncertainty stemming from the election of Donald Trump and its potential impact on green investments like President Biden's Inflation Reduction Act. Sales of these funds peaked at $151 billion globally in 2021 before turning into redemptions last year. While low-carbon funds generally outperformed the wider market with average returns of 13.16% compared to 12.08% for global large market-capitalization funds, clean energy and technology funds, which are highly dependent on capital and government policy, experienced a 5.35% loss in 2024.
Despite the overall outflows from mutual funds, institutional investors, such as pension funds, have maintained strong interest in climate action and sustainable investments. Annual climate finance more than doubled between 2019 and 2022 to $1.46 trillion, with less than half of this coming from the private sector and a significant portion invested directly rather than through mutual funds. Hortense Bioy, global director of sustainable investing research at Morningstar, noted that while the broader category of sustainable funds still reported inflows, the election of Donald Trump has created uncertainty around green investments.
The pushback against ESG (Environmental, Social, and Governance) funds has intensified, with record outflows from sustainable funds in the first quarter of the year. US investors have been decreasing exposure for ten consecutive quarters, and European investors became net sellers for the first time on record, pulling out $1.2 billion. Globally, net outflows reached $8 billion during this period. However, European passively managed sustainable fund strategies, including exchange-traded funds (ETFs), have shown resilience, garnering $3.3 billion in net new money in the fourth quarter of the previous year, largely driven by passive funds which collected $21.3 billion. Regulation in Europe, such as the Sustainable Finance Disclosure Regulation and the upcoming Mifid II amendment, is expected to further accelerate capital flows into sustainable and ESG funds, with Europe making up 84% of the $3.2 trillion held in ESG funds globally.
