What’s Behind 2024 Outflows From US Sustainable Funds

US sustainable funds lagged their conventional peers in returns, on average, in a turbulent 2024.

Sustainable funds faced greenwashing concerns and political controversy last year, driving deeper outflows of money. For the first time last year, the number of sustainable funds available to US investors shrank.

However, outflows and fund closures don’t tell the full story about investor interest in sustainable investing. In Morningstar’s annual US sustainable funds report, our researchers assess trends in sustainable fund flows, assets, and product development.

Here are the highlights.

US sustainable funds are open-end or exchange-traded funds that focus on sustainability, impact, or environmental, social, and governance factors per their prospectus. Morningstar categorizes sustainable investment funds into two groups.

• General ESG investment strategies broadly incorporate ESG factors into security selection and portfolio construction. These strategies may use ESG criteria to help them limit risk, find investment opportunities, and engage with companies. They may also apply certain exclusions.
• Sustainability themed investment strategies explicitly target exposure to one or more sustainability themes as part of their investment process. Funds may target climate action, healthy ecosystems, basic needs, resource security, or human development—or multiple themes at once.

While many funds now consider ESG criteria in the security-selection process, those in our sustainable funds universe make their commitment clear and prominent in their prospectus, offering document, or regulatory filings, usually through binding criteria.

• Parnassus Core Equity Fund PRBLX is one of the leaders offering US large-cap exposure through an ESG lens, according to Morningstar senior analyst Stephen Welch. The fund has earned a Morningstar Medalist Rating of Silver.
• Brown Advisory Sustainable Growth Fund BAFWX has established managers who effectively blend growth-stock investing with ESG thinking, according to Morningstar associate director Tony Thomas. The fund has also earned a Morningstar Medalist Rating of Silver.
• Nuveen Core Impact Bond Fund TSBIX seeks total return, primarily through current income, while giving special consideration to certain ESG criteria. The fund has earned a Morningstar Medalist Rating of Bronze.

The forward-looking Morningstar Medalist Rating finds funds that our manager research team believes will outperform. Asset and wealth managers can explore the more than 242 sustainable funds that earn Gold, Silver, or Bronze ratings through the Morningstar Direct Platform.

Global sustainable funds capped a year of inflows with $16 billion in subscriptions in the fourth quarter. However, in the United States, sustainable funds saw outflows for the second year in a row.

In 2024, outflows from US sustainable funds reached $19.6 billion, up from $13.3 billion in 2023. By contrast, conventional open-end funds and ETFs raked in $740 billion of net new money.

Neither active nor passive funds were spared. Index-tracking options gave up $3.6 billion, which was less than the $8.2 billion redemptions experienced in 2023. Active funds bled $16 billion over the year.

One asset class stayed above water. Sustainable bond funds brought in $2.7 billion over the year as investors sought to lock in attractive yields. Intermediate-core bond strategies led the pack.

Outflows were due in part to the factors below.

• Returns lagged those of conventional peers. High interest rates continued to penalize some areas of the market, such as clean energy stocks and other green stocks.
• Political scrutiny persisted. In a critical election year, anti-ESG backlash reached new heights. Some individual states took legal action to limit the incorporation of ESG criteria in investment decisions.
• Greenwashing concerns endured.

Despite outflows, sustainable fund assets rose to $344 billion in 2024, supported by market price appreciation. The US sustainable funds landscape is more than five times larger than it was 10 years ago.

In Morningstar Direct, asset and wealth managers can analyze asset fund flows data that goes back to 2008, with forecasting models for future growth rates.

According to a widely watched survey by Morgan Stanley published in 2023, 54% of individual investors planned to increase their sustainable investments in 2023, and 77% were interested in sustainable investing.

In a more recent survey from Morgan Stanley, almost eight in 10 asset managers (78%) and asset owners (80%) expect sustainable assets under management and allocations to rise in the next two years, though a lack of data and greenwashing will continue to be challenging.

A recent Morningstar Sustainalytics survey also echoed these findings. In our Voice of the Asset Owner survey, 61% of North American respondents said that ESG has become more material in the past five years. For most asset owners, ESG considerations go hand in hand with fulfilling their fiduciary duty.

Sustainable funds lagged their conventional peers in total returns over the course of the year. Only 42% of sustainable funds landed in the top half of their respective Morningstar Categories, which group portfolios based on their holdings.

Equity funds suffered the worst of the underperformance. Just 38% of sustainable equity funds in the first or second quartile of their respective Morningstar Categories. Fixed-income funds performed better, with almost 48% of sustainable bond funds in the top half of their respective Morningstar Categories.

Sustainable funds also delivered subpar performance over intermediate periods. Over the trailing three-year period, only 37% of sustainable funds landed in the top half of their categories. When including 2020 and 2021, 46% of sustainable funds found themselves in the top half.

In 2024, ESG investing remained at the center of political contention in the United States. It faced challenges through litigation, legislative initiatives, and regulatory decisions.

Looking ahead, anti-ESG efforts are likely to intensify at the federal level. Bills that previously failed in Congress are expected to be reintroduced in 2025, reigniting the legislative debate. These could include:

• “Protecting Americans’ Investments From Woke Policies Act,” a bill constraining pension funds managers from considering non-financial factors when making investment decisions.
• “Prioritizing Economic Growth Over Woke Policies Act,” a bill reducing the SEC’s authority on climate disclosure.

The rollback of ESG initiatives and prevailing anti-ESG sentiment will further worsen “greenhushing,” where companies and investors present more modestly their consideration of ESG factors. This was recently exemplified by the departures of large banks and asset managers from net-zero alliance groups hosted by the Glasgow Financial Alliance for Net Zero.

Overall, how industry players talk about ESG may have to evolve. Terms such as “sustainable investing” weren’t widely used by sampled investors in a recent Morningstar behavioral research report on ESG. Instead, US investors talk more directly about concerns they have related to specific ESG topics, such as climate change. Some may want to consider ESG in their investing, but not as the focal point.

For more analysis, check out the comprehensive US Sustainable Funds Landscape report. Other topics include:

• Sustainable funds with the largest inflows and outflows
• Asset managers with the largest inflows and outflows
• The largest sustainable funds by AUM
• Fund launches and closures
• The best- and worst-performing sustainable funds