Economy zaps sustainable fund flows

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THE BIG IDEA

Sustainable funds are taking a hit and the state of the economy is the culprit.

Fund flows for sustainable funds globally dropped in the first three months of this year to $29 billion, declining from roughly $38 billion in the fourth quarter of last year, Morningstar said in a recent report. The firm attributed the drop to economic pressures like a looming recession and higher interest rates.

Total flows were also hurt by outflows in only two regions: the U.S. and Japan. The U.S. saw $5.2 billion in outflows mostly from a single fund, iShares ESG Aware MSCI USA ETF. (The fund lost more than one-fifth of its value during a single day in trading in March, partly from BlackRock scaling back its allocation to the fund, Morningstar said.) This is the second quarter in a row and the third quarter over the course of one year where the U.S. has logged outflows.

Almost $12.4 billion has been pulled out of sustainable funds in the U.S. over the last year, according to Morningstar.

“Global macroeconomic pressures, including an ongoing energy crisis and rising fears of recession, have driven this retreat,” the firm said in its report specifically focused on the U.S.

Europe experienced the most inflows at $32.3 billion. All other regions paled significantly in comparison.

Global sustainable fund launches were also substantially lower in the first quarter compared with other recent quarters, totaling just 113, according to Morningstar. The report attributed the drop in sustainable product development to a sizable decline in European fund launches. It noted that other parts of the world saw continued momentum.

Global sustainable funds’ assets, meanwhile, climbed to $2.74 trillion from $2.55 trillion, according to Morningstar, marking the second consecutive quarter that they’ve risen. Funds’ assets took a hit in the beginning of 2022 but have been recovering in recent quarters. That growth rate of 7.5 percent was more than the overall global fund market growth rate of 4 percent, according to Morningstar.

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