Climate-focused investment funds start to cool off after 4 years of huge growth

November 22, 2024 at 10:40 AM EST

Global assets in mutual funds and ETFs with a climate-related mandate rose by 6% in the first nine months of 2024 to $572 billion, according to Morningstar Sustainalytics latest edition of its Investing in Times of Climate Change Report released this week.

In all, there are now nearly 1,600 mutual funds and ETFs with a climate-related mandate available to investors around the world compared with fewer than 200 in 2018.

But the Morningstar report shows that interest in climate-oriented funds may be waning as they are likely to experience their first annual redemptions on record, with outflows reaching almost $24 billion in the first nine months of the year. In the four previous years, $345 billion flowed into such funds.

“As the consequences of climate change become increasingly visible and costly, it may be surprising to see outflows from strategies designed to help investors consider climate in their investment portfolios,” said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics. “However, investors can see this either as a risk factor or as an opportunity.”

Several factors have contributed to this trend, Bioy said, including the high interest rates environment, the uncertain political and regulatory backdrop, as well as greenwashing concerns and anti-ESG sentiment.

“Whether these headwinds will subside or continue in 2025 and beyond remains to be seen,” Bioy said.

The new report noted that climate change remains among the top systemic risks for investment portfolios.

“Some investments will be disadvantaged in the transition to a low-carbon economy because of changes in regulation, technology, and consumer behavior, among other factors. If mitigation efforts do not accelerate as temperatures keep rising and extreme weather events, such as flooding or hurricanes, become more frequent, investments will face higher physical risks,” according to the report.

At the same time, more investors are seeking to capitalize on opportunities and invest in companies that develop innovative solutions to mitigate climate change or adapt to it, such as clean energy, electric vehicles, carbon capture and storage, and flood defenses, the authors wrote.

The investment demand is huge: Getting the world on track for net zero emissions by 2050 requires clean energy transition-related investment to accelerate from $1.8 trillion in 2023 to around $4.5 trillion annually by 2030, according to the 2023 International Energy Agency’s Net Zero Roadmap.

Here are other highlights from the report:

Investors are pulling the most money globally from climate solutions and clean energy/tech funds — over $25 billion in aggregate — while climate transition funds suffered withdrawals for the first time.
In the U.S., climate transition funds continued to gather positive flows and have become the dominant category, with assets of $10.7 billion, up 25% in the last nine months, overtaking climate solutions funds.
Funds tracking Paris-aligned benchmarks experienced outflows of $7.4 billion between January and September, despite their general outperformance.
The number of climate funds launched globally fell to 69 in the first nine months of the year, reflecting a normalization of the climate-related product development activity after three years of high growth.
Of the $572 billion in assets in climate-focused mutual funds and ETFs, Europe accounted for 85%, while the market shares of China and the United States ranked far behind, at 6% and 5%, respectively.

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Climate-focused investment funds start to cool off after 4 years of huge growth

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