Employees of NY State Solar, a residential and commercial photovoltaic systems company,
The conversation around sustainable investing has become increasingly marked by greenwashing concerns and a political backlash © AP

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Rocky markets and political pushback drove sustainable funds and ETFs to their largest quarterly outflows in more than five years, a new report shows.

Sustainable US mutual funds and ETFs bled $6.2bn in the quarter ended December 31, the Morningstar report reveals. Even with those redemptions, the funds netted $3bn during 2022, ending the year with $286bn in net assets.

Nearly all of those net inflows happened during the first three months of 2022, when investors piled $10.2bn into the funds, the report shows. During the second quarter, they pulled $1.6bn from the funds and added $459mn to them during the third quarter.

In contrast, all US mutual funds and ETFs bled $370bn in 2022, marking the first year of net outflows since Morningstar began tracking data in 1993.

This article was previously published by Ignites, a title owned by the FT Group.

Outflows from sustainable funds were largely driven by market volatility, as well as by the conversation around sustainable investing becoming “increasingly marked” by greenwashing concerns and political backlash against environmental, social and governance-focused investing, the report noted.

In January, Kentucky state treasurer Allison Ball threatened to pull state pension funds from 11 companies including BlackRock, Citigroup and JPMorgan Chase because those firms boycott energy companies.

In December, Florida chief financial officer Jimmy Patronis announced that the state would dismiss BlackRock as manager of about $600mn in short-term overnight investments and an additional $1.4bn in long-term securities.

In October, Missouri state treasurer Scott Fitzpatrick announced that the state had pulled $500mn in state pension funds from BlackRock, and Louisiana yanked $794mn from BlackRock funds. Both states said that BlackRock’s ESG commitments were the reason for their divestments.

And in August, Texas State Comptroller Glenn Hegar declared that BlackRock and nine European asset managers were boycotting the Texas fossil-fuel industry, prompting the state’s pension fund to divest from the firms.

Investors pulled $2.4bn from passively managed sustainable funds during the fourth quarter, marking their steepest outflows in more than three years, Morningstar’s report notes. The $19.7bn iShares ESG Aware MSCI USA ETF accounted for $1.8bn of those outflows. Overall, the fund bled $318mn last year, separate Morningstar data shows.

In the broader market, passive funds garnered $556bn in inflows during 2022, the report said.

Meanwhile, active sustainable funds shed $3.8bn during the fourth quarter and ended the year with $1.3bn in net outflows, the report said. Overall, actively managed mutual funds and ETFs shed $926bn last year.

“Within the sustainable funds universe, overall, passive funds have definitely seemed more resilient than active funds,” noted Alyssa Stankiewicz, associate director of sustainability research at Morningstar and co-author of the report.

Sustainable funds also recorded worse returns than their non-sustainable counterparts for most of 2022, but managed to “close the gap” in the fourth quarter, Stankiewicz said.

“If you think about how returns are influencing flows, it would be interesting to see the tide turn on flows during the fourth quarter, right after the three quarters of underperformance and right before sustainable funds start to take off,” Stankiewicz said.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignites.com.

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