The global market for sustainable open-end and exchange traded funds (ETFs) recovered in Q4 2024, with net inflows hitting $16 billion—a $9.2 billion increase from the previous quarter, according to ESG and governance analytics firm Morningstar Sustainalytics.
Despite this quarterly surge, global ESG fund inflows for the full year reached their lowest levels since 2018. This comes as the broader market experienced growth, according to the analysts, underscoring the challenges faced by sustainability-focused investments.
Europe remained the primary driver of growth, accounting for $18.5 billion of the Q4 inflows, more than double the $8.9 billion recorded in Q3.
In the US, sustainable fund redemptions deepened, with $4.3 billion in outflows during Q4 compared to $2 billion in Q3. Japan also saw outflows, while sustainable funds in the rest of Asia managed to attract fresh capital. Globally, sustainable fund assets declined by 4% to nearly $3.2 trillion, largely due to market price depreciation.
Product development in the sustainable funds sector gained momentum, with 86 new funds launched in Q4, up from 60 in Q3. However, closures and rebrandings also increased, reflecting ongoing adjustments to regulatory and market demands. In Europe alone, 94 sustainable funds closed or merged in Q4, contributing to 351 closures for 2024. 213 funds globally underwent rebranding during the year, with 50 dropping key ESG terms.
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In the US, sustainable fund liquidations outpaced new launches for the sixth consecutive quarter, highlighting sustained challenges in the market. Meanwhile, the UK introduced sustainability labels to 61 funds, representing $35 billion in assets, marking an important regulatory shift in the region.
Looking ahead to 2025, the ESG fund market is poised for further transformation as anti-greenwashing rules, including the EU’s new ESG fund naming regulations, take effect. According to the analysts, these changes, along with shifting corporate and governmental priorities, are likely to shape the trajectory of sustainable investing.
Hortense Bioy, head of sustainable investing research at Morningstar, said: “Global sustainable funds ended 2024 on a high note, achieving their strongest quarterly inflows of the year. Europe, again, was the driving force. This fresh flow of capital, however, shouldn’t hide another reality. Over the full year 2024, global ESG funds recorded their lowest inflows since 2018, while the rest of the market enjoyed a boom.
2025 might be a reset year, with anti-greenwashing rules reshaping the ESG fund market, companies re-affirming or rolling back their sustainability initiatives, and governments reviewing their priorities amid a changing geopolitical and economic landscape. These are new developments that sustainability-focused investors will have to navigate.”
