The bulk of the outflows came in a single fund, the iShares ESG Aware MSCI USA ETF, which saw more than $9 billion in withdrawals during the year.
At the same time, investors chilled on sustainable funds generally last year, the report said, as flows lagged the rest of the industry.
For instance, in the fourth quarter, net redemptions from sustainable funds amounted to 1.7% of fund assets at a time when funds overall recorded net inflows reaching 0.2% of assets, Morningstar reported.
“This marked the fifth consecutive quarter where investor appetite for U.S. sustainable funds was weaker than for their conventional counterparts,” it said.
This investor reticence came as sustainable equity fund performance lagged. The median return for a sustainable large-blend equity fund in 2023 came in at 20.8%, compared with 23.9% for the category overall, Morningstar reported.
“Some of the macroeconomic pressures that contributed to their underperformance — such as high interest rates and supply chain disruptions — continue to feature in market outlooks for 2024,” it said.
At the same time, the firm pointed to other factors — including persistent greenwashing concerns and political scrutiny of sustainable and ESG investing — as contributing to “a chilling effect on demand for these funds.”
Nevertheless, market gains boosted sustainable fund assets in 2023, which finished the year at $323 billion, up by 18% from the third quarter of 2022.