Global sustainable investment fund flows rebounded sharply in the fourth quarter of 2024, as stronger flows into sustainable funds in Europe more than offset an increased pace of outflows in the U.S., although full year inflows overall remained well below 2023 levels, according to a new report released by ESG ratings, data, and research provider Morningstar Sustainalytics.

For the quarterly report, Morningstar Sustainalytics analyzed activity in the global sustainable fund universe, which encompasses open-end funds and ETFs that, by prospectus or other regulatory filings, claim to focus on sustainability, impact, or environmental, social, and governance factors.

According to the report, sustainable funds globally saw inflows of $16 billion in Q4, up significantly from around $9 billion in Q3, and marking the strongest quarter of the year. The quarter saw a pickup in regional divergence, with net inflows in Europe more than doubling over the prior quarter to $18.5 billion, while U.S. outflows also more than doubled, reaching $4.3 billion.

Despite the rebound in Q4, however, the report found that full year flows fell by half from 2023, even as the broader market benefited from strong inflows, with Morningstar Sustainalytics citing a series of factors affecting sustainable fund flows, including the underperformance of ESG strategies with higher interest rates affecting clean energy and other green stocks, as well as greenwashing concerns, regulatory changes, and growing anti-ESG sentiment in the U.S.

Even as full year flows weakened however, the global sustainable fund universe ended the year at a new annual high of $3.2 trillion in assets, increasing 8% over the prior year, and up more than 3x over the past 5 years.

By region, Europe’s domination of the sustainable fund market increased, with nearly $2.7 trillion in assets and over 5,500 funds, representing 84% of global assets and 73% of funds. The U.S. has seen its share of assets fall to 11% from 15% over the past seven years, with only 612 funds.

European sustainable fund inflows increased to $18.5 billion for the quarter, but declined for the full year to $52.4 billion, compared with $77.7 billion in 2023, according to the report. The fourth quarter saw a particularly sharp rebound in sustainable equity funds in Europe, with inflows of $12.3 billion, up from just $1.5 billion in Q3, while fixed income inflows stayed relatively steady at $12.3 billion and allocation funds saw $4.1 billion outflows.

One of the key factors shaping the sustainable fund landscape noted by the report was an acceleration in the trend of funds dropping or changing ESG-related names, ahead of new fund naming rules such as the FCA’s SDR in the UK, and the implementation of ESMA’s ESG fund naming guidelines.

Morningstar Sustainalytics anticipates a continued acceleration in sustainable fund rebranding, with potentially 30% – 50% of EU ESG funds changing their names by mid-2025 to comply with the new regulatory guidelines.

In the U.S., the report found that net outflows continued for the 9th consecutive quarter, reaching $4.3 billion in Q4, compared with $2 billion in Q3,  amid an environment of political scrutiny, greenwashing concerns and high interest rates. Full year 2024 sustainable outflows accelerated to $19.6 billion from $13.3 billion in 2023, and only 10 new sustainable funds were introduced, compared to more than 100 launches in 2021 and 2022, while 71 sustainable funds closed in the U.S. in 2024.

By fund manager, the report found that BlackRock continues to dominate the sustainable fund space, with $423 billion in assets, well ahead of UBS in second place at $180 billion and Amundi at $178 billion. BlackRock also saw the strongest sustainable fund flows for the year of $15.1 billion, ahead of JPMorgan in second place at $13.4 billion, and Swisscanto at $11.3 billion.

Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics, said:

“Global sustainable funds ended 2024 on a high note, achieving their strongest quarterly inflows of the year, despite multiple headwinds. 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.

“2025 might be a reset year, with anti-greenwashing rules reshaping the ESG fund market, companies re-affirming or scaling back their sustainability commitments, and governments reviewing their priorities amid a changing geopolitical and economic landscape. These are new developments that sustainability-focused investors will have to navigate.”

Click here to access the report.