As we mark Earth Day 2024 today, Morningstar’s latest report, Investing in Times of Climate Change: 2023 in Review, is particularly timely. Morningstar’s latest report covers the Global climate fund landscape, as well as breakdowns of the European, Chinese, US and Rest of the World landscapes, as well as a breakdown in strategies including Low Carbon, Climate Transition, Green bond, Climate Solutions and Clean Energy/Tech funds.
Key Takeaways from the Morningstar report :
- Assets in mutual funds and ETFs with a climate-related mandate globally rose by 16% in 2023 to $540 billion, driven by continued inflows, product launches, and market appreciation.
- Europe accounted for 84% of these assets, while China and the United States ranked far behind, with market shares of 7% and 6%, respectively.
- Flows into climate funds amounted to $40 billion globally in 2023, accounting for more than half of the total flows into the overall fund universe, which netted $75 billion.
- Still, the $40 billion inflows into climate funds last year represented the lowest levels in four years, mostly due to the substantial redemptions from Climate Solutions and Clean Energy/Tech strategies, which were plagued by high interest rates and sticky inflation.
- In Europe, passive funds accounted for 56% of the climate fund assets, but 87% of the flows in 2023. Funds tracking EU Paris-aligned or climate-transition benchmarks hit $155 billion, up 50% compared with a year earlier.
- As of Dec. 2023, we identified 1,652 climate-related funds globally, up from 1,206 a year earlier.
Climate Transition Strategies Grow By 30% in 2023
- Climate Transition funds have grown in the past couple of years to become the largest climate fund category with USD 210 billion in assets, up 25% in the last year.
- Climate Solutions funds reached USD 128 billion at the end of 2023, up 23% compared to a year earlier. In that category, Energy Transition and Electric Vehicles/Smart Mobility remain the most prominent single themes, with $47 billion of combined fund assets.
- By contrast, assets in Clean Energy/Tech funds tumbled by 23% to $58 billion at the end of 2023.
- The standout performer was the Green Bond fund category, nearly doubling its asset size with an impressive 41% surge, though its share remained relatively small. Issuers across industries, particularly those in hard-to-abate sectors, continue seeking finance for capital intensive, decarbonization projects as part of their climate transition plans.
While no fund in our climate fund universe is aligned to a 1.5-degree Celsius warming scenario, some exhibit higher emission management quality than others.
Low Carbon and Climate Transition funds invest in, or tilt towards, companies that tend to manage their emission reduction better than those held by Climate Solutions and Clean Energy/Tech funds. This is reflected in the higher average emission management score of the former two categories relative to the latter two.
Hortense Bioy, global director of Sustainability Research, Morningstar, commented “The global landscape of climate funds continued to grow last year despite the challenging macroenvironment of high interest rates and inflation which plagued green sectors, especially renewable energy.”
“One area worth monitoring is climate transition and Paris-aligned funds. These strategies have expanded significantly in the past couple of years and can be expected to evolve as investors intensify their scrutiny of companies’ transition plan and demand better management of climate risks.”
