Capital Inflow to Climate-Themed Mutual Funds Hits Four-Year Low

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Funds flowing into global mutual funds investing in climate themes have recorded the lowest level in four years. Internally, this is attributed to the continued high interest rate environment causing poor performance of eco-friendly companies, and externally, to the spread of political backlash against green growth.

According to Morningstar on the 28th (local time), last year, global mutual funds related to climate attracted only $37.8 billion in new investments. This represents a 75% plunge compared to 2021, when climate-themed investments peaked at $151 billion, and is the smallest net inflow since 2019.

Notably, despite last year being a year when the climate crisis was felt globally through wildfires, droughts, floods, and heatwaves, the enthusiasm for related investments cooled, drawing attention.

The main reason is the unimpressive returns of eco-friendly company stocks. The 'S&P/TSX Renewable Energy and Clean Technology Index' (TXCT) closed down about 37% over two years from the end of 2021 to 2023. The stock price of Ørsted, the world's largest offshore wind power company based in Denmark, has dropped about 72% from its 2021 peak to date.

It is analyzed that Western countries, having first experienced the poor performance of eco-friendly companies due to high interest rates and the sharp rise in fossil fuel energy prices caused by the Russia-Ukraine war, are losing their illusions about green growth. Additionally, the voices of global politicians opposing climate crisis campaigns have increased, such as U.S. Republican Senator Ted Cruz stating that "ESG is a dangerous movement that undermines corporate profitability and hinders economic growth," which also had an impact.

Instead of funds flowing into climate-themed funds, money is pouring into money market funds (MMFs) that guarantee high returns amid high interest rates. According to market research firm EPFR, inflows into U.S. MMF funds reached about $11.9 trillion last year (as of November). This is more than six times the average annual net inflow of $179 billion from 2012 to 2022.

While pessimistic forecasts continue for climate-themed funds, on the other hand, some evaluations suggest that investment enthusiasm could rebound. This is primarily because visible climate changes are increasingly approaching. Also, global renewable energy capacity is expanding, and sales of eco-friendly products such as heat pumps and electric vehicles continue to grow, indicating outward growth.

Hortense Bioy, Global Director of Sustainability Research at Morningstar, said, "At the UN Climate Summit held last December, countries around the world agreed to triple renewable energy capacity and double energy efficiency by 2030 to achieve carbon neutrality by 2050," adding, "Accordingly, climate-themed funds are maintaining a very positive state (for investment)."

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