Sales of climate-focused mutual funds fall 75% in two years

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Sales of climate-focused mutual funds have fallen by 75 per cent in two years as the market struggles with challenges from high interest rates to poor performance and a US political campaign against “woke” investment.

Climate-focused funds attracted just $37.8bn of new investor money in 2023, compared with a record $151bn in 2021, according to provisional figures from data provider Morningstar. Last year was the worst for net inflows since 2019, when interest in green investments intensified.

The slowdown in sales comes at a crucial time for climate finance and as the world experienced its hottest year on record, with extreme weather, droughts, wildfires and flooding. 

A report by the Climate Policy Initiative think-tank said last year that climate finance must increase at least fivefold, from about $1.3tn in 2021-22, as soon as possible, to avoid the worst effects of climate change.

Marcus Björkstén, a portfolio manager at Fondita Fund Management, said some climate-focused funds had struggled to maintain returns because of fallout from inflation and high interest rates since the coronavirus pandemic and Russia’s war on Ukraine.

Worries about energy security since the Ukraine war have also pushed up the share prices of fossil fuel companies and damped enthusiasm for some clean energy investment.

Hortense Bioy, global director of sustainability research for Morningstar, said despite the slowdown, green mutual funds were holding up better than the wider market. 

“There is still money flowing in, but it is less than previous years because of the macro environment,” she said.

According to the Morningstar data, the broader category of ESG mutual funds reported its first-ever quarter of outflows at the end of 2023, with investors pulling out $2.5bn globally, while many conventional funds also suffered redemptions. 

High interest rates…