Sustainable funds won the war for capital in 2022

Turbulent markets and a political backlash hurt, but flows into sustainable funds were still much stronger than into conventional funds.

Morningstar’s Global Sustainable Fund Flows: Q4 2022 in Review is out. You can read it here. It’s a fascinating summary of the sustainable investing market following a tough and turbulent 2022.

A few points really stand out.

Europe dominates

Europe is still far and away the dominant sustainable investing market with 83% of global sustainable assets, followed by the US on 11%, and all others combined just 6%.

In Europe, flows into sustainable funds held up far better than than those into ‘conventional’ funds, even though flows into both sets of funds wobbled during 2022.

Net fund flows, European sustainable & conventional funds, US$bn

Morningstar said (in their Q3 report):

“sustainable fund flows demonstrated overall resilience against market volatility compared with traditional peers as sustainability-focused investors—who are typically values-driven and long-term-oriented—are slower to pull money from funds they are invested in“.

US suffers anti-ESG backlash

The US sustainable funds market was less resilient, with flows falling sharply after Q1 and significant outflows in Q4. [Note also that peak quarterly sustainable fund flows over the last two years in the US (just over US$20bn) were much lower than those in Europe (around US$150bn)].

Net fund flows, US sustainable* funds, US$bn

Morningstar said:

"the conversation around sustainable investing was increasingly plagued by concerns about greenwashing and an anti-ESG sentiment. In the U.S., prominent politicians have spoken out against ESG investing, and some have taken measures to limit state investment funds from doing business with asset managers based on perceptions of those managers' ESG approaches."

However, investors should bear in mind that the share of sustainable assets compared to the overall market in the US is tiny. While there are significant headwinds at the moment, even a modest turnaround in sentiment could be huge in terms of the size of the sustainable investing market.

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