Sales of climate change-focused mutual funds fall 75% in two years

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Sales of climate change-focused mutual funds have fallen 75% in two years as the market struggles with challenges from high interest rates to poor performance to a U.S. political campaign against “woke” investing.

Climate change-focused funds raised a record $151 billion in new investor capital in 2021, compared to a record $151 billion in 2021, according to preliminary figures from data provider Morningstar. It remained at $37.8 billion. Last year was the worst year for net inflows since 2019, when interest in green investing increased.

The sales slowdown comes at a critical time for climate finance, with the world experiencing the hottest year on record, with extreme weather events, droughts, wildfires and floods.

A report by the think tank Climate Policy Initiative last year said climate finance needed to increase by at least five times as soon as possible, from around $1.3 trillion in 2021-22, to avoid the worst impacts of climate change. said.

Marcus Bjorksten, portfolio manager at Fondita Fund Management, said some climate funds will maintain their returns amid the impact of the coronavirus pandemic and the highest inflation and interest rates since Russia’s war with Ukraine. He said he was having a hard time.

Concerns over energy security since the Ukraine war have also pushed up stocks of fossil fuel companies and dampened enthusiasm for some clean energy investments.

Hortense Bioy, global director of sustainability research at Morningstar, said green mutual funds are holding up better than the broader market despite the economic slowdown.

“Money is still flowing in, but it is lower than in previous years due to the macro environment,” she said.

Broad-category ESG mutual funds reported their first-ever quarterly outflows at the end of 2023, with investors withdrawing $2.5 billion globally, while many traditional funds also experienced redemptions, according to Morningstar data. I was disappointed.

High interest rates are causing investors to withdraw money from long-term funds in favor of higher-yielding money market funds and physical instruments. Flows into U.S. money market funds hit a record of about $1.19 trillion in the first 11 months of last year, according to data tracking firm EPFR.

Politicians including French President Emmanuel Macron have said the private sector needs to step in and invest in climate action, especially because of the fiscal damage caused by the pandemic.

Eamonn Ryan, Ireland’s environment minister and co-chair of the International Energy Agency, said he was “concerned” about the decline in new money being invested in funds focused on climate change, but that “It’s just part of a bigger picture.”

He added that renewable energy capacity increased by 39% last year, and sales of heat pumps and electric vehicles also increased.

Mr 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 remained “very important” to meet global climate goals. However, Björksten said the environment for funds and portfolio companies remains challenging.

Investors are nervous about policy changes as many countries roll back environmental plans, including Germany watering down its ban on gas boilers.

Meanwhile, renewable energy companies are having to deal with supply chain disruptions, rising costs and rising interest rates. Some projects have been abandoned because they are no longer commercially viable.

As a result, stock prices have slumped over the past two years, with shares in Danish energy group Ørsted and heat pump provider Nibe having halved since 2021.

The S&P/TSX Renewable Energy and Clean Technology Index fell approximately 37% from the end of 2021 to 2023.

Björksten said that despite the “bleaker” outlook, there was still a huge need for green business and investment “because climate change is only going to get worse”.

Mr. Bioy said that the climate change crisis is particularly important after countries agreed at the COP28 climate change summit in December to transition away from fossil fuels, triple renewable energy capacity and double energy efficiency by 2050. It added that the “long-term momentum” for the volatility-focused fund “remains very positive”. By 2030.

Total assets under management for climate-focused funds rose 14% last year to about $522 billion, according to Morningstar.