US Sustainability Funds Struggled in 2022: Morningstar

Investors pulled $6.2 billion out of sustainable investment funds in the fourth quarter of 2022, according to Morningstar — but ended the year in a better position than the wider US fund sector.

Over the course of 2022, a net $3 billion flowed into US-domiciled sustainable investment funds, Morningstar’s report found. This was significantly better than the US fund industry as a whole, which experienced a net outflow of $370 billion, largely due to market factors such as volatility and high inflation.

Despite this, many sustainable funds lagged in terms of performance in 2022. This was in part due to a rally in energy stocks, many of which are not held by sustainable or impact investment funds due to their higher carbon emissions.

“Although both sustainable funds and their non-sustainable counterparts saw outflows in the fourth quarter, the short-term loss was more severe for sustainable funds,” Morningstar’s report stated. “For the first quarter in more than three years, the US sustainable funds landscape saw a lower organic growth rate than the total US fund universe.”

Passive sustainable-themed funds experienced the highest level of quarterly outflows in more than three years in the fourth quarter of 2022, with $2.4 billion withdrawn.

Outside of the US, however, sustainable-themed funds — including impact investment funds — proved resilient in the face of multiple headwinds, Morningstar reported.

Globally, sustainable funds attracted almost $37 billion of net new money in the last three months of last year, the report showed — 50% more than the inflows recorded in the third quarter.

In contrast, Morningstar reported that the overall global fund universe experienced net outflows of $200 billion in the fourth quarter, on top of a similar amount in the third quarter.

“Macroeconomic headwinds, including enduring inflationary pressures, rising interest rates, and lingering recession fears have persisted during the fourth quarter, spelling trouble for global fund markets,” Morningstar’s report stated.