Sustainability Funds Grow to $3.5 Trillion AUM, Outperforming Traditional Investments

Sustainable funds have surged to $3.5 trillion in assets under management (AUM), even as inflows have slowed. The $20 billion in inflows recorded in the first half of 2024 marks a slower pace compared to previous periods, but sustainable funds still outperformed traditional peers by 0.6 percentage points. The growing focus on sustainability is helping these funds remain resilient and continue attracting capital despite market fluctuations.

According to a report from Morgan Stanley’s Institute for Sustainable Investing, inflows into sustainable funds reached 0.6% of year-end 2023 AUM, while the performance of these funds remains strong. Equities, which make up 57% of sustainable fund holdings, played a key role, as large-cap stocks outperformed, helping these funds achieve a 1.7% median return compared to traditional funds’ 1.1%.

Over the last five years, sustainability funds have consistently delivered superior returns, outperforming traditional funds by 4.7%. A $100 investment in a sustainable fund in December 2018 would have grown to $135 by June 2024, compared to lower returns from a similar investment in a traditional fund. This outperformance, combined with less downside volatility, reinforces the long-term appeal of sustainable investments.

In May 2024, a $12 billion outflow impacted sustainable funds, contributing to a slower rate of overall inflows. Despite this, sustainable funds are still expected to grow, with 60% of respondents projecting increased value from these strategies over the next two years. Investors continue to view these funds as critical for managing downside risk and gaining exposure to decarbonization and environmental goals.

Sustainable funds are expected to remain a key player in global markets, with Morgan Stanley noting that they offer a complementary return profile and lower volatility. As sustainability continues to drive market performance, these funds are poised to capitalize on long-term trends in renewable energy, resource efficiency, and electrification.

Morgan Stanley’s report concludes: “Sustainability funds’ equity exposure has helped maintain their outperformance, especially in sectors benefiting from the energy transition.”