The flow of money out of sustainable funds in the U.S. accelerated in 2024 as interest rates and lagging performance coupled with political backlash to give investors pause.
Morningstar reported that $19.6 billion was withdrawn from U.S. sustainable open-end and exchange-traded funds last year, the second straight down year following redemptions of $13.3 billion in 2023. By contrast, conventional fund peers enjoyed significant inflows of about $740 billion, supported by interest-rate cut expectations and an artificial-intelligence-related stock rally, the financial-information company said in a post on its website.
“Sustainable funds faced many headwinds in 2024. They continued to lag conventional peers, with only 42% of sustainable funds landing in the top half of their respective Morningstar categories. High interest rates continued to penalize some areas of the market, such as clean energy stocks and other growth stocks,” Morningstar said.
Stock funds fared worse than their fixed-income counterparts, with just 38% landing in the top half of their respective categories vs. 48% for sustainable fixed-income funds.
While they may not have done as well as conventional funds, sustainable investments certainly had a respectable year. Among large-blend equity funds (the largest grouping within the U.S. sustainable funds universe), Morningstar calculate that the median return for sustainable funds was 20.7% in 2024.
That was only slightly lower than the 21.5% median gain for conventional funds, but more than 3 points worse than the 24.1% gain for the overall Morningstar U.S. Market Index.
In addition to the lagging performance, U.S. sustainable funds were also affected by the political climate, Morningstar noted.
“In a critical election year, the backlash against environmental, social, and governance investing intensified, and political scrutiny reached new heights. Some individual states took legal action to limit the incorporation of ESG criteria in investment decisions,” the company wrote.
As a result of those headwinds, the number of funds that closed or dropped their ESG mandates exceeded the number of new fund launches for the first time, leading to a contraction in the U.S. sustainable funds universe.
Here are the sustainable funds with the largest outflows in 2024:
New sustainable arrivals
Morningstar reported that only 10 sustainable funds came to market in 2024, while 71 sustainable funds were either merged or liquidated and 24 dropped their ESG-focused mandates. That left 587 sustainable open-end funds and ETFs at the end of 2024, down 9% from 2023.
Among the newcomers, there were three that were notable. Invesco MSCI North America Climate ETF and Invesco MSCI Global Climate 500 ETF took in more than $4 billion in combined assets by the end of 2024. Both ETFs invest in leading companies in terms of carbon reduction and climate-focused business practices.
KraneShares Sustainable Ultra Short Duration Index ETF [symbol link=KCSH[ was the third-largest new offering, reaching $224 million in assets at the end of 2024. The fund invests in investment-grade corporate bonds from issuers committed to net zero emissions by 2050 while excluding companies involved in fossil fuels and unsustainable activities.
Despite the outflows, assets in sustainable funds rose last year to $344 billion, supported by market price appreciation. This represents 6.3% annual growth but a 6.0% decline from the record seen at the end of 2021.
Actively managed funds still top the sustainable funds landscape, but low-cost passive funds continue to gain popularity, reaching over 40% of U.S. sustainable fund assets at the end of 2024.
Read more: 5 small-cap stocks that are unique to sustainable investing funds
