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Investors withdrew about $30bn in total from climate-focused mutual funds in 2024 after a four-year boom was undone by difficult economic conditions and the clouds cast over socially responsible investing by the election of Donald Trump.
It marked the first year since at least 2019 in which investors pulled out more than they had put in, highlighting the challenges facing the sector despite the global push to deal with climate change.
Assets under management grew more than seven-fold in the preceding four years to a record $541bn. But this dropped for the first time to $533bn last year, as positive market valuations failed to fully offset redemptions.
Sales fell from a peak of $151bn globally in 2021 to redemptions of $29bn last year, according to provisional figures on open-ended and exchange traded funds from Morningstar, the data provider, shared with the FT.
The decline in sales came despite growing calls for the private sector to provide more capital to address climate change, as governments struggle with stretched budgets in the wake of the Covid-19 pandemic. Last year was also the hottest year on record as global warming worsened.
Morningstar’s head of sustainable investing research, Hortense Bioy, said the election of Trump — who has called climate change a hoax and pledged to repeal President Joe Biden’s signature clean energy bill, the Inflation Reduction Act (IRA) — had created “uncertainty” around the case for green investments.
Rightwing campaigns against so-called environmental, social and governance investing also hampered sales, she said.
Investors had continued to back funds with a broader climate focus, such as green bonds, low-carbon or climate transition offerings.
Low-carbon funds outperformed the wider market in 2024, returning an average of 13.16 per cent compared to 12.08 per cent for global large market-capitalisation funds.
But those funds invested in areas facing high capital costs or reliant on government policy, such as clean energy or green technology, suffered outflows. Clean energy and tech funds lost 5.35 per cent in 2024.
Ben Constable-Maxwell, head of impact investing at M&G, the UK asset manager, said the last couple of years had been “challenging” as rising interest rates hit renewable energy and other capital-intensive climate-focused companies.
“Many of those types of companies that would be in a pure climate solutions fund have struggled to operate and to perform from an investment perspective,” he said. “So the financial performance has been challenging. That naturally acts as a headwind towards client interest.”
The Morningstar data shows that 81 climate funds were closed or merged last year, up from 49 in 2023, while only 74 were launched compared to a record high of 295 in 2022.
In November, economists said that the world would need up to $6.7tn a year by 2030 for climate action. Annual climate finance more than doubled between 2018 and 2022, from $674bn to $1.46tn, according to a report from the Climate Policy Initiative. Under half came from the private sector, with a large chunk invested in projects instead of through equity markets.
Despite the redemptions from mutual funds, several asset managers said demand from institutional investors such as pension funds — which often invest through individual pots, rather than investment funds that pool together investor cash — remained strong.
Investors including global pension funds recently heavily backed a new $500mn green bond issue that was six times subscribed.
“The interest [from institutional investors] is growing exponentially,” said one asset management executive.
The redemptions came despite overall sales of $1.1tn of all open-ended funds last year, while the wider group of sustainable funds also reported inflows, Bioy said.
Many green energy companies now had “better fundamentals than a few years ago”, she added, after being forced to restructure and cut costs in response to high interest rates and the rising costs of materials.
“The stocks were probably overvalued then. The question is are they undervalued now? But there is still uncertainty — around Trump and what’s going to happen to the IRA.”
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