US Sustainable Funds Suffer Seventh Consecutive Quarter of Outflows, Assets Remain Flat

Investors pulled $4.7 billion from US sustainable funds in the second quarter of 2024, making it the seventh-consecutive quarter of outflows.

Investors pulled $4.7 billion from US sustainable funds in the second quarter of 2024, marking the seventh-consecutive quarter of outflows. These outflows, however, were half of those experienced in the first quarter, which amounted to almost $9 billion.

Meanwhile, the overall US market of funds posted organic growth of 0.3% in the past three months, after expanding by 0.7% in the first quarter of the year. (Quarterly organic growth is calculated by dividing quarterly flows by assets at the beginning of the quarter.)

Although the motivations behind outflows cannot be precisely quantified, several key factors contribute to this trend. These include high interest rates, which have made alternative investment options more appealing and diminish the attractiveness of sustainable funds. Additionally, the mediocre returns of sustainable funds in 2023 have led to investor dissatisfaction and subsequent withdrawals. Concerns about greenwashing have also contributed to reduced investor confidence, as skepticism grows regarding the genuine sustainability credentials of some funds. Furthermore, the increasing politicization and regulatory scrutiny of ESG investing have prompted some investors to reevaluate their positions, resulting in further outflows.

Active ESG funds experienced outflows of $3.7 billion in the second quarter, which is $1 billion less than the redemptions recorded in the previous quarter. Similarly, outflows from index-tracking products slid to $960 million from the restated $4.3 billion of outflows in the first quarter.

ESG bond funds kept positive momentum with inflows of $320 million, down from the restated $868 million in the first quarter. Meanwhile, sustainable equity funds shed $4.7 billion.

Topping the outflows table was Parnassus Core Equity Fund, with redemptions of $758 million. Long known as the largest US sustainable fund, Parnassus Core Equity has been one of the 10 biggest losers in terms of redemptions for more than two years straight, shedding more than $5 billion over that period. Parnassus attributes a portion of the fund’s outflows to the launch of a less expensive collective investment trust and the subsequent conversion of investors from one vehicle to the other. Our data includes only open-end and exchange-traded funds. Parnassus Core Equity Fund focuses on large-cap US companies with sustainable competitive advantages, quality management, and positive ESG performance.

It is followed by Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF, which bled $484 million in the last quarter. The fund focuses on companies that operate in accordance with market standards on ESG controversy screens, emphasizing sustainability and climate improvement.

Meanwhile, iShares ESG Aware MSCI USA ETF suffered net withdrawals of $439 million, after bleeding $1.8 billion in the previous quarter. The fund experienced outflows for a sixth-consecutive quarter. In 2023, iShares ESG Aware MSCI USA ETF experienced outflows of more than $9 billion. The fund favors stocks with high ESG ratings.

The sustainable fund that collected the largest net flows for the second quarter was First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund, which garnered $456 million. This fund employs a modified market-capitalization-weighting methodology, emphasizing companies engaged in significant smart-grid-related activities.

Next was Fidelity U.S. Sustainability Index Fund with $246 million in inflows, after collecting more than $430 million in the previous quarter. The fund invests in US companies with high ESG performance relative to their sector peers.

Vanguard continues to have two funds in the bestselling league table: Vanguard ESG US Stock and Vanguard FTSE Social Index Fund. The duo gathered $260 million in the second quarter, after attracting $512 million in the previous quarter.

In the past three months, assets in US-domiciled sustainable funds remained roughly unchanged at $336 billion at the end of June 2024, helped by market appreciation.

BlackRock, the world’s largest manager, tops the list, with $57 billion of assets in ESG-focused open-ended assets and ETFs, at the end of the second quarter. It is followed by Parnassus and Eaton Vance, which includes the Calvert brand, with approximately $39 billion and $36 billion, respectively.

The second quarter of 2024 mimics the first quarter, with three new sustainable fund launches.

Carbon Collective Short Duration Green Bond ETF focuses on sustainability by investing primarily in investment-grade green or sustainable corporate bonds with an average duration of five years or less. The fund includes bonds that are either self-labeled as green, in line with International Capital Markets Association guidelines, or certified under the Climate Bond Standard.

Invesco MSCI Global Climate 500 ETF focuses on companies that minimize exposure to physical and transition risks associated with climate change, including those achieving benchmarks for yearly reductions in greenhouse gas emissions relative to their

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