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 have prompted investors to pull money out of longer-term funds, in favour of higher-yielding money market funds and cash products. Inflows to US money market funds hit a record of nearly $1.19tn in the first 11 months of last year, according to data-tracking company EPFR.

Politicians including French President Emmanuel Macron have said the private sector must step in and invest in climate initiatives particularly because of the damage to public finances from the pandemic. 

Eamon Ryan, Irish environment minister and co-chair of the International Energy Agency, said it was “concerning” that new money being invested in climate-focused funds had dropped but that they were “just one part of a much bigger picture”.

He added that renewable energy capacity increased by 39 per cent last year, while heat pump and electric vehicle sales were rising.

Bioy said private equity and debt were also important sources of climate finance. Multilateral development banks are also providing more investment. 

François Gemenne, a professor at HEC Paris Business School, said investment funds were still “crucially important” in meeting global climate goals. But the environment for funds and the companies they invest in remained challenging, said Björkstén.

A number of countries have backtracked on green plans — such as Germany watering down its ban on gas boilers — leaving investors nervous about policy changes.

Renewable energy companies, meanwhile, have had to cope with supply chain disruption, rising costs and higher interest rates. Some projects have been abandoned because they are no longer commercially viable.

Shares have suffered over the past two years in response: shares in Danish energy group Ørsted and in heat pump provider Nibe have more than halved since 2021. 

The S&P/TSX Renewable Energy & Clean Technology index fell by almost 37 per cent between the end of 2021 and 2023. 

Björkstén said that despite the “gloomier” outlook, there was still a huge need for green business and investment “because climate change is just getting worse”. 

Bioy added that the “long-term drivers” for climate-focused funds “remain very positive”, especially as countries at the COP28 climate summit in December agreed to transition away from fossil fuels by 2050 and to triple renewable energy capacity and double energy efficiency by 2030.

Total assets under management in climate-focused funds rose 14 per cent last year to almost $522bn, Morningstar said.