Full-Year 2023 ESG Trends: An Analysis of ESG Fund Outperformance by Morgan Stanley

Whether you are a long-term ESG investor or wondering what the hype is, a recent report by Morgan Stanley takes a deep dive into sustainable funds as a whole and reports on their (continued) outperformance throughout the full year of 2023.

The Morgan Stanley Institute for Sustainable Investing, established in 2013, publishes a ‘Sustainable Reality’ series to assess sustainable funds’ versus traditional funds’ historical performance. Their most recent report “Sustainable Reality: Sustainable Funds Show Continued Outperformance and Positive Flows in 2023 Despite a Slower Second Half” looked at sustainable fund performance from January 1, 2023 through December 31, 2023 and found that, overall, sustainable funds returned +12.6% compared with traditional funds which returned +8.6%. This significant outperformance is part of a long-term trend of sustainable funds outperforming traditional funds (except for 2022), and is likely due to the growth-oriented, long-term positioning of sustainable funds.

Overall, the report found that:

  • Sustainable Funds Outperformed Across All Major Regions and Asset Classes
  • Investor Demand for Sustainable Funds Grew, But Slowed Towards the End of the Year
  • Sustainable Fund Investment Strategies Created More Focused Sector Exposure
We’ll look at each of these claims and break down the report for you!

Overall Methodology

This report focused on closed-end fund, exchange-traded fund, and open-end fund performance for approximately 97,000 funds globally from January 1, 2023 through December 31, 2023 using Morningstar data. Morningstar classifies sustainable funds as funds that specifically claim a focus on “sustainability, impact investing, or environmental, social or governance (ESG) factors” in regulatory filings; funds employing ESG factors in a non-binding way are not considered.

These sustainable funds were compared against traditional funds, or funds classified as ‘Not Sustainable’ by Morningstar. Total return was calculated using Morningstar’s method of “taking the change in monthly net asset value, reinvesting all income and capital-gains distributions during that month, and dividing by the starting net asset value (NAV).“ For more information on methodology, view page 2 of Morgan Stanley’s report.

1. Sustainable Funds Outperformed Across All Major Regions and Asset Classes

Over the last five years, sustainable funds have outperformed traditional funds every year except for 2022. This year, sustainable funds returned to outperforming traditional funds, with a median return of +12.6% compared with traditional funds’ +8.6%. This was the case for all asset classes and geographies, and most pronounced for equities, funds domiciled in regions of smaller AUM (Asia and South America), and fund capital focused in the Americas.

Renewable Energy investment with EGEA SRI investments - EGEA SRI


Sustainable outperformed traditional funds when analyzed by domicile region, with sustainable funds outpacing in Asia by +4.8% and in South America by +2.2%. When broken down by capital investment region, the Americas starkly outperformed by +8.9%.


When analyzed by asset class (Equity, Fixed Income, and Other which includes “multi-asset, property, commodities, and alternative fund types”), sustainable equity funds saw median returns of +16.7% compared to traditional equity funds +14.4%. Sustainable fixed income returns were up +10.0% compared to traditional funds at +6.4%, and the Other category showed a sustainable return of +11.4% vs. 6.9% traditional return.

Renewable Energy sustainable portfolios with EGEA SRI investments - EGEA SRI


When equities were organized by market cap (Small, Mid, and Large) and investing style (Value, Blend, and Growth), sustainable funds outperformed traditional funds in all categories except Small-Cap Growth, which accounts for only ~2% of funds, and Mid-Cap Blend, which only underperformed its traditional counterpart by 0.5%. Most of this sustainable fund outperformance came during the first half of the year and ended up being most pronounced for all large cap investing styles.


Fixed income funds were organized by credit quality (Low: BB and lower, including all high-yield bonds; Medium: BBB to A; and High: AA and higher) and interest-rate sensitivity (Limited: short-term duration; Moderate: medium-term duration; and Extensive: long-term duration), with Low Limited representing the safest funds of short duration and high quality and High Extensive representing the riskiest funds of long duration and low quality.

Sustainable funds outperformed traditional funds in all but two of the nine categories, and had notably higher returns in the Medium Limited category (+10.2% vs +7.7%), High Limited category (+10.3% vs. +5.7%), and High Extensive category (+12.1% vs. +7.3%). In fixed income overall, 2023 saw outperformance in lower quality credit across all durations, and while sustainable funds tend to skew to the middle of the credit quality spectrum and away from shorter-dated debt, this skew did not suggest significant negative impact on relative performance.

2. Investor Demand for Sustainable Funds Grew, But Slowed Towards the End of the Year

While the majority of global sustainable fund AUM growth in 2023 was driven by returns, net inflows remained positive at +4.7% of prior year-end AUM with a slowing toward the end of the year. Regional divergence in flow trends resulted in European-domiciled and Europe-focused funds seeing the greatest inflows and North American-domiciled funds seeing small outflows.


Sustainable fund AUM grew to $3.4 trillion by YE2023, representing 7.2% of total AUM globally. This is up from 7.1% for YE2022 but slightly down from 7.3% for 1H2023.


Europe is home to almost all sustainable AUM and funds. 87% of total sustainable AUM is based in Europe compared with 10% in North America and <3% in all other domiciles. In terms of investment region, 42% of AUM are targeted globally, 35% to Europe, and 13% to the Americas.


Inflows into sustainable funds were net positive at $136 billion for FY2023, which was equivalent to 4.7% of 2022 year-end AUM. Inflows for traditional funds were proportionately smaller at $610 billion, or 1.6% of 2022 year-end AUM. 2022 saw a sustainable fund inflow of 3.4% of prior year AUM compared to traditional funds, which saw strong outflows.

Renewable Energy portfolio investment with EGEA SRI investments - EGEA SRI

3. Sustainable Fund Investment Strategies Created More Focused Sector Exposure

The tailored scope of sustainable equity funds like low-carbon portfolios have created more emphasis in certain sectors than their traditional counterparts. While those funds with global, European, and APAC investment focus tend to skew toward Industrials and Healthcare, funds with focus in the Americas tend to be overweight Technology. This Technology-heavy positioning helped bolster outperformance in 2023.

In 2023, Industrials remained the most overweight sector in sustainable funds compared to traditional funds (16% vs. 12%). Next was Technology and Healthcare, both 1.5% overweight based on traditional fund exposure. During the year, traditional funds shifted more toward Energy and Financials, a move which the sustainable space did not follow, leading to relative underweight positions of -4% and -3%, respectively.

Renewable Energy portfolio investment with EGEA SRI investments - EGEA SRI

To better understand the role of sector exposure in the sustainable fund space, the report compared the difference in median performance between sustainable and traditional funds to the sector weighting differences and the performance of those sectors within the S&P 500. The analysis broadly suggests that about half of sustainable fund relative outperformance is due to sector exposure differences.

Renewable Energy portfolio investment with EGEA SRI investments - EGEA SRI


Morgan Stanley’s recent analysis on sustainable fund performance for the full year of 2023 reported:

  • Sustainable funds returning to outperformance of traditional funds, continuing a five year trend (excluding 2022) and particularly in equities and in funds focused on the Americas
  • Increasing investor demand for sustainable funds with positive inflows throughout the year that were proportionally far greater than traditional fund inflows
  • More focused sector exposure in Industrials, Technology, and Health Care than in traditional funds, with Technology exposure particularly bolstering outperformance

Overall, sustainable fund performance is robust, especially in the Americas, and growth is strong. Read the full Morgan Stanley Sustainable Reality report here and contact our EGÉA SRI team to learn more about our tailored sustainable fund offerings.