Global climate funds are on track to experience their first year of outflows on record, with near $24bn (£19bn) in redemptions from January to September, according to Morningstar’s Sustainalytics report.
While inflows for the sector peaked in 2021 at near $150bn, 2023 still saw inflows of near $40bn. But so far in 2024, just green bonds and low carbon funds have managed to eek out inflows. Climate solutions and clean energy/tech funds have experienced the largest redemptions, at $15bn and $10.3bn, respectively.
Despite the redemptions, global climate assets are up 6% in the first nine months of the year. Climate transition funds rose 14% and low carbon strategies increased 18%. Green bond funds however, which have seen investor inflows throughout the year, dropped 1.3% while assets in clean energy and tech fell 17%.
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Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics said: “As the consequences of climate change become increasingly visible and costly, it may be surprising to see outflows from strategies designed to help investors consider climate in their investment portfolios.
“However, investors can see this either as a risk factor or as an opportunity. Several factors have contributed to this trend, including the high interest rates environment, the uncertain political and regulatory backdrop, as well as greenwashing concerns and anti-ESG sentiment.”
While climate transition funds rose 14% in the year through September and have seen steady increases in assets through recent years, the category has not seen the inflows it experienced previously.
“Passive funds tracking Paris-aligned benchmarks (PABs) and climate transition benchmarks (CTBs) dominate the Climate Transition funds category, reaching USD 168 billion in assets at the end of September 2024, up almost 9% from December 2023,” Bioy said.
“Many of these are repurposed funds. They used to track a plain-vanilla or an ESG index and they switched to a PAB or CTB index at some point in recent years.”
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While those passive PAB strategies had attracted positive inflows in previous years, in 2024 they’ve experienced near $7bn in outflows, while other climate transition strategies, including active strategies, have shown inflows.
Following the struggling flows to sustainability this year, there have been just 69 fund launches in the climate funds space to the end of September, down from over 200 in 2023. While this number will likely increase in the final three months of the year, Morningstar said it reflects the “normalisation of the climate-related product development activity after three years of high growth”.
In assessing the funds by an implied temperature rise, Morningstar found that “no fund is aligned to a net zero pathway consistent with a 1.5-degree Celsius global warming scenario”. As a category, climate transition funds averaged the lowest score at 2.3 degrees Celsius. In terms of emission management practices, green bond funds and climate transition funds scored highest, with clean energy/tech and climate solutions funds scoring worst. Morningstar stated this could be because of the nature of the fund, which is producing products to aid in climate solutions, rather than a sole focus on manufacturing process.
“Investors who simply want to protect their portfolios against climate change risks can use Low Carbon funds to “decarbonize” their portfolios. These approaches provide broad and diversified exposure to the market and are therefore suitable as part of a portfolio core allocation,” Bioy said.
“In fact, within an asset allocation, Low Carbon funds can substitute for a lot of core equity exposure. They would, however, be less suitable for investors who want to benefit from the opportunities offered by the climate transition. For that, investors must choose from the remaining types.”
