Local sustainable funds fall into outflows: Morningstar

Sustainable funds offered in Australia and New Zealand shed almost US$120 million, ending a three-quarter run of positive inflows, according to Morningstar.

Despite the outflows, total sustainable fund assets across Australia and New Zealand grew to about US$40.2 billion at the end of May, up US$3 billion from March-end.

The latest quarterly analysis found active sustainable funds bore the brunt of redemptions, while passive strategies continued to attract fresh capital, highlighting investors' ongoing preference for lower-cost investment options.

The Australasian sustainable funds market remains concentrated among a small group of managers. Dimensional Fund Advisors continues to dominate the active segment with US$8.1 billion in sustainable assets under management, while Betashares (US$4.6bn), Vanguard (US$3.3bn), and iShares (US$3.1bn) lead the passive market.

By asset class, equity strategies attracted the strongest inflows, gathering about US$45 million, while allocation funds added roughly US$40 million.

However, these gains were offset by net outflows of US$125 million from fixed income funds and US$80 million from miscellaneous strategies, including real assets.

In terms of regulation, Australia's mandatory sustainability reporting regime has entered its first implementation phase, with ASIC issuing early observations and maintaining a strong focus on greenwashing enforcement. The first phase of the regime began in 2025 with Group 1 companies.

There are companies that meet at least two out of three criteria for having over $500 million (US$351m) in revenue, over $1 billion (US$700m) in consolidated assets, or over 500 employees, required to make AASB S2-compliant climate-related financial disclosures for financial years starting in 2025.

The local region bucked the modest gains recorded globally. Sustainable funds worldwide attracted an estimated US$3.7 billion in net inflows during the second quarter, extending the recovery that began earlier this year following a difficult 2025.

The US was the standout performer, recording nearly US$3 billion in net inflows after 14 consecutive quarters of withdrawals. It marked the first quarter of positive flows for US sustainable funds since early 2022 and helped push total US sustainable fund assets to a record high of almost US$400 billion.

However, Morningstar said the global headline figure masked significant regional divergence, with continuing outflows across Australia, New Zealand, Canada, Japan and much of Asia ex-China offset by the US rebound.