Mid-Year 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 in the first half 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 Return to Outperformance in First Half of 2023” looked at sustainable fund performance from January 1, 2023 through June 30, 2023 and found that, overall, sustainable funds returned +6.9% compared with traditional funds which returned +3.8%. 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:

  1. Sustainable Funds Returned to Outperforming Traditional Funds
  2. Investor Demand for Sustainable Funds is Increasing
  3. The Amount of Global AUM in Funds Using Restriction Screening is Increasing
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 96,000 funds globally from January 1, 2023 through June 30, 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 Returned to Outperforming Traditional Funds

Over the last five years, sustainable funds have outperformed traditional funds except for in 2022. This year, sustainable funds returned to outperforming traditional funds, with a median return of +6.9% compared with traditional funds’ +3.8%. This was the case for all asset classes and geographies, and most pronounced for equities and in Oceania and North America.

Sustainable Funds Return to Outperforming Traditional Funds EGEA SRI


Sustainable outperformed traditional funds when analyzed by all regions, with sustainable funds outpacing in Oceania by +3.7% and in North America by +2.5%.


When analyzed by asset class (Equity, Fixed Income, and Other which includes “multi-asset, property, commodities, and alternative fund types”) sustainable equity funds had a strong return of (+10.9%) compared to traditional equity funds (+8.0%). Sustainable fixed income returns were +3.8% compared to traditional funds at +2.2%, and the Other category showed a sustainable return of +5.9% vs. 3.3% traditional return. Morgan Stanley claimed that this outperformance was likely due to a growth focus in equities and longer duration in fixed income.

Sustainable Funds Return to Outperforming Traditional Funds EGEA SRI


When equities were organized by market cap (Small, Mid, and Large) and investing style (Value, Blend, and Growth) categories, sustainable funds outperformed traditional funds in all categories except small growth. This outperformance was most pronounced in the Large Blend (+3.5%) and Large Growth (+6.2%) categories, and the report posited this was due to “specific stock or thematic exposures.”


Fixed income funds were organized by credit quality (Low:

Sustainable funds outperformed traditional funds in all but three of the nine categories, and had notably higher returns in the Medium Limited category (+5.5% vs. +2%) and High Extensive category (+5.8% vs. +2.6%). Sustainable fixed income funds are generally medium risk and medium-term to long-term duration, and so larger market moves likely supported their successful performance in the first half of 2023.

2. Investor Demand for Sustainable Funds is Increasing

Investor interest and demand for sustainable funds remained strong in 1H23. This was evidenced by the continued growth of sustainable funds’ AUM as a proportion of total AUM up to a record high of 7.9%, as well as net positive inflows (cumulatively $57 billion by the end of June 2023 for a total over $3 trillion) that were proportionately larger than traditional fund inflows.


Despite the amount of money classified as sustainable AUM dropping in 2022, this increased again in 1H23 to over $3 trillion, nearing 2021 highs of around $3.3 trillion. Total AUM in 2022 also dropped due to challenging market conditions. Thus, when looking at sustainable funds as a percentage of total AUM, this percentage has only been increasing over the years, reaching a record high of almost 8% of total AUM.


Europe is home to almost all sustainable AUM and funds. 89% of total sustainable AUM is based in Europe compared with 10% in North America and <2% in all other regions. When it comes to sustainable funds, 77% are based in Europe compared with 12% in North America and 11% in all other regions.


Inflows into sustainable funds were net positive at $57 billion for the year in 1H23, which was equivalent to around 2% of 2022 year-end AUM. Inflows for traditional funds were proportionately smaller at $111 billion, or 0.3% of 2022 year-end AUM. 2022 saw a sustainable fund inflow of 3% of prior year AUM compared to traditional funds, which saw strong outflows.

Sustainable Funds Return to Outperforming Traditional Funds EGEA SRI

3. The Amount of Global AUM in Funds Using Restriction Screening is Increasing

In just the past four years, the use of restriction screening has grown sharply, from 2% of global AUM in 2019 to over 20% of global AUM in 2023. The most commonly used screens are for controversial weapons (20% of global AUM), thermal coal (14%), and tobacco (14%), but the use of all screening themes are increasing.

Screening is one of several widely used tools that investment managers or asset owners can use to responsibly invest. The use of screening has drastically increased in the last few years, now covering over a fifth of global AUM, including 90% of sustainable funds and 16% of traditional funds. This sharp growth is partially attributed to the EU’s Sustainable Finance Disclosure Regulation (SFDR) coming into effect in 2021 and going into full effect in 2023. The SFDR mandated ESG disclosures for asset managers to create more transparency around sustainable investment strategies. As of 1H23, 61% of Europe’s AUM is screened, compared to 2% of North America’s AUM and 8% of Asia’s AUM. Most screened funds (about 50%) use 2-5 screens, and this has remained relatively stable since 2019.

Sustainable Funds Return to Outperforming Traditional Funds EGEA SRI

Investing responsibly doesn’t just mean with environmental or social sustainability in mind: values and morals based in consumer protection to human rights to religious views are all widely used screens. In fact, the most widely used screen is for controversial weapons, covering almost 20% of global AUM and used in over 16,000 funds. This is followed by thermal coal (14.3%), tobacco (14.1%), and an other category (10%) which can include operations in countries with human rights concerns or companies whose products or services have a negative impact on customers in a more general sense. For more on the restrictive screening categories, see the Appendix on page 15 of the report.

Sustainable Funds Return to Outperforming Traditional Funds EGEA SRI


Morgan Stanley’s recent report on sustainable fund performance in the first half of 2023 sees:

  • Sustainable funds returning to outperformance of traditional funds, continuing a five year trend excluding 2022 driven by market conditions that were more favorable to sustainable funds’ positioning
  • Increasing investor demand for sustainable funds with positive inflows throughout the year that were proportionally far greater than traditional fund inflows
  • Increasing use of restriction screening now covering over 20% of global AUM

Overall, sustainable fund performance and growth are doing exceptionally well, especially in Europe, and are only projected to increase. Read the full Morgan Stanley Sustainable Reality report here and contact our EGÉA SRI team for any questions regarding our sustainable fund offerings!