European exchange-traded funds with a focus on ESG investing saw a substantial decline in inflows in the first quarter amid what Morningstar called “an existential crisis”.
According to the Financial Times, net inflows into these funds totaled 7.1 billion euros, or $7.62 billion, in the first three months of the year. This was down from 13.8 billion euros in the final three months of 2023, equal to $14.8 billion.
As a result, the portion of ESG fund inflows during the period fell to 16% of total net flows into exchange-traded funds, down from 29% in November to December 2023.
The trend is the latest sign of trouble in energy transition industries as wind, solar, and EV companies struggle with persistently high interest rates, rising raw material costs, and growing competition from low-cost Chinese producers.
“This means further deceleration from the highs of 2022 when close to 65 percent of all flows into the European ETF market were directed to ESG-themed strategies,” Morningstar associate director of passive strategies Jose Garcia-Zarate said.
The news follows a revelation in March that a total of 70% of passive funds passed off as “sustainable” by five of the largest asset managers in the U.S. and Europe were exposed to companies developing new oil and gas projects, according to a report by environmental organization Reclaim Finance.
Reclaim Finance has examined 430 “sustainable” passive funds managed by five of the biggest passive fund managers – Amundi, BlackRock, DWS, Legal & General Investment Management (LGIM), and UBS AM – and found that 70% of the passive funds are exposed to companies developing new fossil fuel projects.
These giant asset managers “are turning a blind eye to the climate impact of their passive investments, with funds invested in oil giants including TotalEnergies, Shell and ExxonMobil, and coal developers such as Glencore and Adani,” Reclaim Finance said in the report.
