Assets in mutual and exchange-traded funds with a climate-related mandate globally rose by 16% in 2023 to $540 billion, according to data collected by financial services firm Morningstar.

The report said the increase was driven by continued inflows, product launches and market appreciation. Europe accounted for 84% of the climate-related assets, while China and the U.S. had market shares of 7% and 6%, respectively.

However, the $40 billion of inflows into climate funds last year represented the lowest levels in four years, according to Morningstar, mostly due to the high level of redemptions from climate solutions, and clean energy and technology strategies, which were “plagued by high interest rates and sticky inflation”, Morningstar said in a report.

The green bond fund category, nearly doubled its asset size in 2023 with a 41% surge, even as the iShares Green Bond Index Fund registered the largest annual outflow of $1.7 billion.

Also of note was that no fund in the Morningstar climate fund universe was found to be completely aligned to a 1.5-degree Celsius warming scenario, the key ambition of the 2015 Paris climate treaty.

“The global landscape of climate funds continued to grow last year despite the challenging macro environment of high interest rates and inflation which plagued green sectors, especially renewable energy,” said Hortense Bioy, global director of sustainability research at Morningstar, said in a news release.

In Europe, passive funds accounted for 56% of the climate fund assets, but 87% of the flows in 2023. Energy transition and electric vehicles remained the most prominent single themes, with $47 billion of combined fund assets.

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