Industry Updates

ESG ETFs enter period of ‘crisis’, Morningstar warns

Q1 data revealed ESG’s percentage of total flows dropped 13% from Q4

Lauren Gibbons

Climate ESG

European ESG ETF inflows fell a sharp 49% quarter-on-quarter in Q1 as investors continued to pivot to US and global developed exposures.

According to data from Morningstar, ESG ETFs in Europe saw €7.1bn inflows last quarter, down from €13.8bn in Q4 2023.

This accounted for just 16% of overall inflows which hit €44.5bn over the three months. This market share was down from 29% in Q4 2023.

“ESG appears to be going through a period of existential crisis as flows, while still positive in absolute terms, dwindle as a proportion of total flows,” Jose Garcia-Zarate, associate director of passive strategies at Morningstar, said.

“It appears some investors forsake the long-term, fatigued by prolonged underperformance.”

Overall, European ETFs and exchange-traded commodities (ETCs) saw assets under management (AUM) grow to a record €1.8trn last quarter, up from €1.6trn in Q4 2023.

This was driven by significant demand for equity ETFs, which raked in €36.8bn, as investors favoured US equity exposure amid strong company earnings from the likes of Nvidia.

Meanwhile, the increasing trend to active ETFs continued, with inflows doubling to €2.1bn in Q1, up from €1.1bn the previous quarter.

Assets in active ETFs now total €33.6bn which represents 1.9% of total assets invested in European ETFs.

Thematic ETFs managed to flip back into inflows, pulling in €350m after two quarters of outflows in the second half of 2023.

Despite AUM reaching new highs, total flows into ETFs and ETCs were down 6% quarter-on-quarter as flows into bond ETFs slowed amid rate cut reevaluations from investors.

Overall, bond ETF inflows fell from €14.1bn to €8.8bn in Q1.

Commodity ETCs and ETFs also staggered, with €2.2bn of outflows after €4.9bn in Q4 despite gold hitting all time highs in the quarter.

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