Outflows from Europe’s ESG funds continue to worsen

The European sustainable fund industry experienced outflows in the third quarter due to concerns about economic uncertainty and regulatory changes.

• Funds in the lower sustainability classification saw 20.5 billion euros ($21.7 billion) pulled out, while net inflows into the higher classification were their lowest since early 2021.
• Investment funds not marketed as sustainable, on the other hand, received 17.8 billion euros in inflows, although this was down from the previous three months.
• Funds that incorporate environmental, social and governance (ESG) goals into their mandates have struggled since a boom earlier this year, pressured by better returns elsewhere and regulatory shifts.
• The Sustainable Finance Disclosure Regulation (SFDR) in Europe has led managers to downgrade hundreds of their funds to a lower sustainability category.
• Morningstar reported that 60% of the redemptions in the third quarter disproportionately affected funds classified as ‘Article 8’ under SFDR and which had “no commitment to sustainable investments”.
• Funds in the highest sustainability bucket, known as Article 9, saw weak inflows of 1.4 billion against 3.7 billion in the second quarter since SFDR’s introduction in March 2021.
• U.S sustainability funds are also struggling, with investors exiting U.S. funds in general in the period but sustainable funds faring worse, registering their fourth consecutive quarter of outflows.

In Europe, ESG funds launches totalled 126 in the third quarter, down 31% from the second quarter.

Learn more: Reuters