However, in spite of a collective outflow of $2.5bn at the global level, European and Asia-ex Japan funds continued to see inflows, Morningstar’s Global Sustainable Fund Flows: Q4 2023 in Review reported.

Global assets also rose by 8.2% to $3trn amid a backdrop of market turmoil and geopolitical concerns, and there was a “minor uptick” in the number of sustainable funds brought to market around the world in Q4 – 121 were launched compared to 114 in Q3.

Hortense Bioy, global director of sustainability research, Morningstar, commented: “The global ESG fund flow picture in the last quarter may look bleak, but ESG funds in Europe – by far the largest market – continued to hold up better than the rest of the fund universe. Global ESG fund assets kept rising too. The disappointing reality is that active managers failed again to prevent redemptions in a corner of the market where it’s easier for them to prove their worth. By contrast, passive funds demonstrated consistent resilience.”

Quarterly global sustainable fund flows

Active managers see outflows in Europe

Despite being the biggest sustainable fund market, with 84% of the global sustainable fund assets, Europe attracted only £3.3bn in net new money in Q4, down from the $11.8bn that Europe gained in Q3.

Morningstar’s report said “the decline in subscriptions was entirely attributable to actively managed sustainable strategies” – they saw $18bn in outflows in the fourth quarter, following net outflows of $4.8bn in the previous quarter. Passives attracted net new money of $21.3bn.

European sustainable fund flows ($)

European fund flows compared with conventional fund flows

However, sustainable funds fared better than European conventional funds, which bled $25.4bn in Q4.

Over 2023 as a whole, European sustainable funds saw $76bn in inflows, down from $149bn in 2022.

“A few factors contributed to the lower inflows into sustainable funds in Europe last year,” the report said. “The challenging macroenvironment, including high interest rates, inflation and fears of recession in some parts of the world, among other implications, has led investors to favour government bonds, an area that has limited ESG products. ESG integration remains challenging in that corner of the fixed-income market – in fact, it is not feasible in the case of single-country government funds like US Treasuries or UK gilts.

“Also, it is fair to assume that some investors took a more cautious approach to ESG investing last year in the wake of the underperformance of ESG and sustainable strategies in 2022, partly due to their typical underweight in traditional energy companies and overweight in technology and other growth sectors. While the technology sector rebounded in 2023, other popular sectors in sustainable strategies continued to underperform. Renewable energy companies, for example, have been particularly affected by soaring financing costs, materials inflation, and supply chain disruptions, among other issues.”

Morningstar also flagged greenwashing concerns and the ever-changing regulatory environment as further dampeners to ESG appetite.

However, supported by price appreciation across most equity and bond markets, Morningstar noted assets in European sustainable funds rebounded to $2.5trn, a 7% increase from the previous quarter. Product development slowed in Q4 as “asset managers have been more cautious in their development of new ESG and sustainable strategies because of greenwashing accusations and the uncertainties of the regulatory environment”, Morningstar said. There were 364 launches in 2023, significantly lower than the 683 seen a year earlier.

‘Chilling effect’ in the US

Investors pulled $5bn from US sustainable funds in the final quarter of 2023, playing its part in pushing global sustainable fund flows into negative territory for the first time on record. A total of $13bn exited US sustainable funds in 2023, as the anti-ESG backlashacross the pond gained further momentum.

“In addition to middling returns, greenwashing concerns persisted in the absence of clear regulation for ESG and sustainable investing,“ Morningstar commented. “Finally, the continued politicisation of ESG investing contributed to a chilling effect on demand for sustainable funds.”

Active funds accounted for 90% of the net withdrawals and Morningstar said Parnassus Core Equity – long known as the largest sustainable fund – has been one of the 10 biggest losers in terms of outflows for more than two years straight, shedding more than $4.5bn over that period.

Despite the outflows and performance that lagged conventional peers, market appreciation pushed US sustainable fund assets higher to close out the year at $323bn. Morningstar said this is a 12% decline from the all-time high but an 18% increase from the recent low in Q3 2022.

Taiwan dominates in Asia

Excluding China, the Asia ex-Japan region recorded net inflows of roughly $1.4bn over the fourth quarter, with the highest inflows coming into Taiwan-domiciled sustainable funds.

Meanwhile, India- and Malaysia-domiciled sustainable funds saw $44m and $20m in net outflows over the quarter, respectively, with the former ending 2023 with four-consecutive quarters of outflows totalling $226m.

However, and like the other regions, total assets in sustainable funds across Asia ex-Japan climbed 5% over Q4 to $61bn, with Taiwan housing 20% of the region’s assets.

There were 29 new funds launches in Asia ex-Japan – the largest amount since Q3 2022.

Japan saw its seventh-consecutive quarter of outflows, with net withdrawals amounting to $2.4bn as passives also turned into outflows after months of outflows from largely active funds. There were also no new funds brought to market in the region in which Morningstar said was a “quiet year” for product development.

All charts Morningstar Direct. This article was written for our sister title ESG Clarity

2024’s calendar of elections kicked off this weekend with the Taiwanese election, which immediately careered into controversy. However, markets appear to be untroubled by any potential escalation in geopolitical tensions it may bring about. Is this a sign of things to come, where markets largely ignore the outcome in the busiest year for elections in history?

The Taiwanese election demonstrated some of the potential pitfalls for the year ahead, as China condemned global governments for welcoming the pro-independence victor from the Democratic Progressive party. A US State Department spokesperson congratulated the Taiwanese for “demonstrating the strength of their robust democratic system and electoral process”. This drew ire from China’s foreign ministry, which said the comments “seriously violated US promises that it would only maintain cultural, economic and other non-official ties with Taiwan”.

Markets have taken no notice of this exchange, possibly because relations between the US and China were already weak and it does not alter their position significantly. This reinforces the prevailing narrative that elections don’t matter very much for developed markets. Certainly, analysis of stock markets through history seems to support this view.

Dina Ting, head of global index portfolio management at Franklin Templeton ETF, says: “Data for US markets show that over the longer term, presidential election outcomes tend to have very little impact on market moves.”

See also: Momentum: Seven risks for investors to watch for in 2024

Analysis from Brian Levitt, global market strategist at Invesco, shows that in the US, neither party can claim superior economic or market performance. The stock market posted positive returns across most administrations, with the rare exceptions of presidencies that ended in deep recessions. He adds that the S&P 500 index has delivered an average annual return of approximately 10% since it started in 1957 through both Democratic and Republican administrations.

A similar picture emerges in analysis of UK markets. Research by AJ Bell of all 16 of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is indifferent to a change of government – and may even welcome it: “On average, the FTSE All Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another ushered into it. There are also greater average gains when a government changes relative to when it remains the same.”

However, it can create volatility, and this appears more likely this year than in previous election cycles.

Ting adds: “Typically, the widest range of possible market outcomes relative to other periods of the election cycle occur during the uncertain 12 months preceding election day. With current volatility in the low teens, we see the risk of politically induced spikes throughout the year. Historically, the 12 months leading up to elections post average volatility of 17% in years when the same party continues its hold on the White House; in years when the presidency flips, that figure rises to over 20%. Given the fraught political backdrop, we may see a more nervous market than what is currently priced.”

Anthony Willis, investment manager at Columbia Threadneedle, says there is significant potential for politics to influence markets in the year head. He sees an ‘ugly battle for democracy in the US’ adding: “We are likely to see legal processes involved and the Supreme Court will probably have a role. With the election so tight, it may make a difference. This will be a backdrop all year.”

He also believes it may affect economic outcomes for the year ahead: “Incumbent leaders are going to do all they can to stay in power, so expect governments to do what they can on the fiscal side.”

Oxford Economics is expecting major changes to tax policy in 2025 whatever happens in the election: “Republicans will rush to prevent Trump-era tax cuts from expiring at the end of the year, while Democrats will also feel an urgency to prevent a similarly timed expiration of expanded subsidies for health insurance. In a divided government, a grand bargain that permanently extends key tax priorities of both parties would add at least $1trn to deficits through 2033, and even more beyond.”

Under either party, trade policy is likely to remain protectionist, though in different ways. The Democrats may continue to favour industrial subsidies and regulation, while a Republican administration would likely turn to imposing more tariffs on the rest of the world.

In emerging markets, it is possible that a change of government may create specific investment opportunities. In Mexico, for example, there is a view that the incumbent government has not been friendly to companies looking to ‘near-shore’, meaning the country is missing out on an historic opportunity to draw in investment. The elections in June 2024 could bring in a more investment-friendly government and exploit an easy win for the Mexican economy.

Equally, elections around the world may provide an important barometer of the support for democracy. In major countries such as India and the US, democracy is wobbling. EU parliamentary elections may also see the strength of support for far right parties across Europe. It may be destabilising for markets if democracy appears to be under significant threat.

However, in all these cases, there are two problems for investors. The first is that even if they can predict the outcome for an election, and then the economic changes that are likely to stem from it, it is difficult to pick the resulting market outcome. The second is that there is not much they can do about volatility, and the right course of action is usually to stay invested.

Levitt concludes that monetary policy and innovation are likely to be far greater drivers of market returns: “Investors should be less interested in politics and more interested in private sector business leaders who are going to harness artificial intelligence and robotics. They may be able to help cure debilitating diseases, evolve the nation’s energy sources, and develop new technologies and industries that aren’t even on the radar.”

Markets may not be as sanguine over all the election outcomes as they have been over Taiwan and there could be plenty of noise around elections in the year ahead. However, trying to predict investment returns based on an election outcome is tough and investors are likely to be better off riding out market volatility and staying invested.

This article was written for our sister title Portfolio Adviser

The firm described it as a ‘landmark achievement’ in its global expansion strategy, and a crucial step in the Middle East market.

Blacktower also revealed it has established Blacktower Insurance Services LLC in Orlando, Florida as part of its expansion strategy in the US.

Group chairman John Westwood said: “Securing the full licence in Dubai and expanding further in the US market reflects Blacktower’s unwavering commitment to global excellence.

See also: Mattioli Woods eyes ‘robust acquisition pipeline’ as assets inch down to £15.2bn

“The company is at the forefront of providing tailored financial solutions, and its strengthened presence in the Middle East and its expansion in the US are a testament to Blacktower’s strategy of delivering unparalleled financial advice and services across borders.”

Gavin Pluck, group managing director, added: “Together with our extensive licensing footprint, the new DIFC entity will afford us the perfect opportunity to provide fully holistic and seamless cross-border solutions in highly regulated international markets, which can often be restrictive to many advisers.

“We therefore find ourselves in a relatively unique position with the ability to advise our UAE clients on their assets locally and in other regulated jurisdictions, including the UK, EU, USA, Switzerland and Australia.”

See also: Söderberg & Partners makes further IFA purchases