ESG ETFs Enter ‘Crisis’ Period, Morningstar Warns

European ESG ETF inflows fell a sharp 94% quarter-on-quarter in the first quarter as investors continued to pivot to U.S. and global developed exposures.

According to data from Morningstar, ESG ETFs in Europe received €7.1 billion inflows last quarter, down from €13.8 billion in the fourth quarter of 2023.

This accounted for just 16% of overall inflows which hit €44.5 billion 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) assets under management (AUM) grew to a record €1.8 trillion last quarter, up from €1.6 trillion in Q4 2023.

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

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

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

Thematic ETFs Rally

Thematic ETFs flipped back into inflows, pulling in €350 million 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 €8.8 billion in Q1.

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