By Virginia Furness

LONDON, Jan 27 (Reuters) - Money flowing into global sustainable funds shrank by half in 2024 and in Europe closures of such funds outpaced new launches, as anti-ESG sentiment and subpar returns dulled the appeal of the investment strategy, Morningstar Sustainalytics said on Monday.

The funds' best quarter for inflows came at the end of 2024, the research firm said, with $18.5 billion of inflows largely going into passive European funds.

But after initial enthusiasm for Environmental, Social and Governance (ESG,) investment, the bigger picture is that poor performance, strong EU regulation and an intense anti-ESG campaign in the U.S. are driving investors and managers away from the asset class, Morningstar Sustainalytics said.

Inflows to global sustainable funds plunged $36 billion last year, the lowest since 2018, after ballooning to $645 billion in 2021, shrinking by half while the conventional funds market, driven by U.S. stocks, enjoyed a boom, the analysts said in a note.

Last year was a particularly turbulent one for sustainable funds, the research company said, with high interest rates hitting clean energy and other green stocks and climate-sceptic Donald Trump elected as U.S. president.

In his first few days in office, Trump has pushed back against ESG areas such as diversity and called for unfettered growth of the U.S. fossil fuel industry. Many ESG portfolios are underweight in energy stocks because of their emissions profile.

While European sustainable funds still booked inflows, albeit at a much slower pace than the conventional market, in the U.S., investors pulled $19.6 billion from sustainable funds in 2024, with Q4 marking nine consecutive quarters of outflows, the data shows.

Meanwhile in Europe, regulatory efforts to clamp down on greenwashing - false claims made about the environmental benefits of funds or assets - are seeing asset managers shutter or rename funds or drop ESG mandates.

Some 351 sustainable funds closed or merged in 2024 with an additional 115 funds dropping ESG related terms. Morningstar expects between 30% and 50% of ESG funds will rebrand by mid-2025 due to new fund naming and labelling requirements.

The total number of sustainable funds tracked by Morningstar in Europe is 5,502 and 621 in the U.S.

(Reporting by Virginia Furness;Editing by Alison Williams)

((Virginia.Furness@thomsonreuters.com; +44207 542 5477;))