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Key Impact Points:
- Sustainable funds hit $3.5 trillion in assets under management (AUM) in 2024, despite slowing inflows.
- Sustainable funds posted a 1.7% median return, outperforming traditional funds’ 1.1%.
- Over the past five years, sustainable funds have outperformed traditional peers by 4.7%.
Why it matters:
Sustainable funds have surged to $3.5 trillion in AUM, even as inflows slow. 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 funds stay resilient and continue attracting capital despite market fluctuations.
What’s new:
The report from Morgan Stanley’s Institute for Sustainable Investing shows that while inflows into sustainable funds have slowed, reaching 0.6% of year-end 2023 AUM, 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%.
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Performance insights:
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. In contrast, the same investment in a traditional fund would have yielded lower returns. This outperformance, coupled with less downside volatility, reinforces the long-term appeal of sustainable investments.
Challenges and trends:
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 see these funds as critical for managing downside risk and gaining exposure to decarbonization and environmental goals.
Looking ahead:
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 be a driver of market performance, these funds are poised to capitalize on long-term trends in renewable energy, resource efficiency, and electrification.
What they’re saying:
Morgan Stanley’s report concludes: “Sustainability funds’ equity exposure has helped maintain their outperformance, especially in sectors benefiting from the energy transition.”
For more details, read the full Morgan Stanley report.