• Global sustainable investing (SI) funds saw continued net positive inflows in 2024, and global SI assets under management have recovered to reach historical highs. Over 50% of European SI funds performed in the top 50th percentile year to date.
  • Even amid record-breaking temperatures, mitigation progress has been encouraging, with renewable share of electricity generation capacity hitting record highs across the world, but focus on adaptation will also be critical.
  • Elevated geopolitical risk may cause further strain on already tenuous multilateral collaboration. Nevertheless, public capital makes up only 10% of all transition investments, and we continue to emphasize the growing opportunities that focus not on policy direction, but on economic fundamentals, including water, electrification, and energy infrastructure.

This past year was marked by significant global events, with nearly half the world's population voting and expressing dissatisfaction with incumbents in the US, UK, EU, and other regions. Geopolitical tensions rose, notably in the South China Sea and the Middle East, and with Iran. Amid these challenges, central banks began cutting rates, and the S&P 500 hit new highs.

Sustainable investing continued to mature despite political risks and negative headlines. Total AUM increased, global flows remained positive, and real-world outcomes showed steady progress, affirming the robust investment thesis and long-term trends driving sustainable investing.

Perspective

Flows and performance

We compare SI and non-SI funds this year based on net flows, net return performance, and index-based performance for this year and the longer term.

1. Global sustainable funds saw net positive flows, driven by fixed income funds

Global sustainable investing funds saw another year of net positive flows through the end of October 2024. Following global fund trends, fixed income strategies drove the vast majority of inflows, with equity and asset allocation (e.g., “60/40” diversified, multi-asset portfolios) funds experiencing net outflows.

Figure 1: Fixed income drove positive net flows

Global SI funds monthly net asset flows by asset class, Jan - Oct 31, 2024, in USD bn

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar in the above three broad asset class categories.

We see this as evidence of sustainability-focused investors continuing in line with the broader market: fixed income and money market funds also received over 80% of 2024 net inflows in broad, non-SI strategies globally. Monthly SI net flows were in line with non-SI in seven of 10 months, with the three exceptions being driven by outflows from equity funds.

Figure 2: SI funds flows directionally same as traditional funds in 7 out of 10 months

Monthly global net flows for SI and non-SI funds, Jan - Oct 2024, in USD bn.

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar in equity, fixed income and allocation funds.

Over 80% of assets and funds classified as SI by Morningstar are domiciled in Europe (including the UK). The United States makes up around 10% of total invested assets under management (AUM), with the rest of the world being the remainder. US-domiciled funds saw a third year of net outflows, primarily driven by equity strategies. Three index-based strategies drove the bulk of the outflows from US equity funds for the entire year.

The sustainable investing market is highly concentrated, with a few funds and ETFs holding most assets. In the US, 316 funds manage over USD 50mn, totaling USD 350bn, but 80% of these assets are in just 73 funds managing over one billion dollars. This concentration risks volatility if large investors change positions and may lead to the liquidation of smaller funds, reducing investable options.

Figure 3: US SI funds flows net negative, despite inflows in fixed income funds

US-domiciled SI funds monthly net asset flows by asset class, Jan - Oct 31, 2024, in USD bn.

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar and domiciled in the United States in the above three broad asset class categories.

Equity funds continue to dominate the landscape of SI funds across all regions, despite strong net inflows in fixed income funds year to date. Fixed income strategies made up approximately 25% of invested assets and 30% of available funds with more than USD 50mn in AUM globally. Historically, it has been easier for investors to capture sustainability information through equity strategies than fixed income, as well as asset owners' own longer-term investment orientation. We have seen the option set expand for fixed-income SI investors, and would expect this trend to continue.

2. Over half of SI funds performed in the top category quartiles

Performance of SI equity strategies has been mixed in recent quarters and years. As of end of November, 53% of European equity funds (with more than USD 50M in AUM) were in the top half of their peers, as calculated by Morningstar based on net performance (Figure 4). The median performance was the 54th percentile year to date, increasing to 58th percentile in the third quarter.

Figure 4: Over half of European equity funds performed in top half of their categories YTD

% of funds in each Morningstar category performance quartile, as of Nov 31, 2024.

Source: Morningstar, UBS, performance data as of November 31, 2024, accessed on December 4, 2024. Universe includes funds designated as “SI” by Morningstar with more than USD50M AUM. Morningstar-calculated percentage rank in category based on net returns.

Performance of US funds lagged European counterparts this year, with only 43% of funds with more than USD 50M AUM ranking in the top half of their categories (Figure 5). The third quarter was particularly strong, however, with nearly two-thirds of equity funds ending in the top half. The challenged performance this year for US funds likely also partially explains outflows, in addition to asset allocation decisions by investors.

Figure 5: Around 40% of US equity funds performed in top half of their categories YTD

% of funds in each Morningstar category performance quartile, as of Nov 31, 2024.

Source: Morningstar, UBS, performance data as of November 31, 2024, accessed on December 4, 2024. Universe includes funds designated as “SI” by Morningstar with more than USD50M AUM. Morningstar-calculated percentage rank in category based on net returns.

Fixed income funds in both Europe and the United States had similar relative performance in their categories to equity funds. The longer term picture is somewhat different: While the distribution of funds across quartiles has been mostly consistent over the three- and five-year period, the median percentile rank for equity funds over five years was 79th (Europe) and 69th (US).

3. Performance of SI indices varied by approach

At the index level, SI strategies had divergent performance across asset classes and approaches. ESG leader-type strategies met or slightly exceeded their respective benchmark indices (Figure 6). In implementation, investors would have been more likely to experience the outperformance if invested through passive strategies rather than active strategies, as only 33% of active managers (across SI and not SI) beat their benchmark this year, according to CIO research.

Figure 6: Performance of SI indices varied by strategy type

MSCI, Bloomberg, S&P, ICE, and Solactive indices in USD net total return.

Source: Bloomberg, UBS Chief Investment Office (as of November 30, 2024).

Multiple thematic indices continued to lag benchmarks this year, with alternative energy—and clean-tech in particular—ranking toward the bottom. The AI-driven megacap stocks made up a significant majority of the market capitalization of major indices in 2024, and drove performance as well, making it challenging for other sectors focused on longer-term themes to follow.

Fixed income was a different story, with green bonds and multilateral bonds following closely their traditional counterparts.

Investor takeaways:

  • Global SI Fund Flows: Positive global net flows were driven by fixed income funds. Over 80% of assets globally are invested in European-domiciled funds, and over 75% are in equity funds.
  • Performance: Over 50% of European funds ranked in the top half of their peers year to date, compared to 42% of US funds. This underscores the need for selective investment and diversification across different SI strategies and asset classes.

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