It has been reported--based upon an analysis by Morningstar--that “[i]nvestors pulled $5 billion from U.S. sustainable funds in the fourth quarter [of 2023] for a total of $13 billion last year [2023].” According to the same report, this is the “first calendar year of outflows” for “U.S. sustainable funds” “since Morningstar began keeping track more than 10 years ago.” Of course, observing this outflow of funds does not address the critical question: why are investors pulling money from ESG funds?
Morningstar and press reports have proffered a few potential explanations, including: (1) “lagging performance”; (2) “continued political scrutiny in the United States”; (3) and a particularly bad year for one specific fund. While it is impossible to ascribe with absolute certainty the proper balance among these (and other) explanations, there are a few things about the report that should be noted. First, as stated in the report, sustainable funds underperformed conventional funds over the past year (a median of 20.8% for sustainable funds vs. 23.8% for conventional funds), which could lead to withdrawals from ESG funds in the interest of nothing more than greater returns. Second, more than $9 billion of the $13 billion withdrawn from sustainable funds can be attributed to a single fund--indeed, if this fund were excluded from the analysis, passive U.S. sustainable funds would have gained $1 billion over 2023. So, it is altogether possible that the headline result--a decline in the amount invested in sustainable funds--is a mere artefact of a particular year, and does not necessarily support a more far-reaching explanation with deeper implications for ESG investing. Still, the fact that sustainable fund closures outpaced launches in the fourth quarter of 2023--seven new sustainable funds launched (and one existing fund re-classified as a sustainable fund) while sixteen sustainable funds were closed--does serve as a countervailing factor indicating a broader trend in the market.
Nonetheless, one explanation for the decline in monies invested in ESG funds deserves particular scrutiny: the political climate in the United States. Over the past few years, there has been a concerted effort by many politicians, business leaders, and media figures to push back against the growth of ESG investing. This resistance has taken many forms, including lawsuits, state regulations, and executive action. It is altogether possible that this apparently more hostile environment for ESG investing has contributed to a decline in the monies devoted to ESG investing, even if specific withdrawals cannot be directly tied to particular laws or regulations. Rather, this could simply reflect a changing climate and a desire by companies to avoid any controversy associated with ESG investing.
The money flowing out of E.S.G. funds has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red-state boycotts and boardroom debates.
The investing strategy has become increasingly politicized after being used by companies to address environmental, social, and governance issues among their employees, customers and other stakeholders. In a sign of the times, the phrase has been scrubbed from the World Economic Forum’s official program in Davos, after being on the agenda in previous years.
Investors pulled $5 billion out of E.S.G.-focused “sustainable” investment funds last quarter, according to a new report by Morningstar. The withdrawals occurred despite a wider market rally at the end of 2023.
https://www.nytimes.com/2024/01/19/business/dealbook/davos-trump-biden-election.html?smid=nytcore-ios-share&referringSource=articleShare
FAQs
Rather, this could simply reflect a changing climate and a desire by companies to avoid any controversy associated with ESG investing. The money flowing out of E.S.G. funds has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red-state boycotts and boardroom debates.
How does ESG impact investors? ›
ESG factor investing considers environmental, social, and governance factors alongside traditional financial metrics when making investment decisions. This helps identify companies with strong long-term potential.
Why not to invest in ESG funds? ›
Two main critiques are offered: first, ESG investing violates the obligations of fiduciaries to solely focus on financial benefits for their customers and retirement plan participants, instead favoring social and environmental policy goals of no financial significance.
Do investors care about ESG? ›
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
Why are people against ESG? ›
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
What is the problem with ESG funds? ›
When ESG data providers cannot find the data they need, they use estimates, which sometimes result in strange outcomes. Finally, there are inherent biases in the scores, with larger, developed market companies tending to score better than smaller companies, especially in emerging markets.
What are the disadvantages of ESG? ›
Disadvantages of ESG investing
As a result, investors may have fewer investing possibilities. There is no commonly agreed standard for establishing which companies are “ESG-compliant,” making it difficult for investors to compare and evaluate different investment possibilities.
Who created ESG? ›
It refers to a set of metrics used to measure an organization's environmental and social impact and has become increasingly important in investment decision-making over the years. But while the term ESG was first coined in 2004 by the United Nations Global Compact, the concept has been around for much longer.
Are ESG funds actually sustainable? ›
Paradoxically, they found that while these ESG funds tended to hold companies that had high ESG ratings, they also had more violations of labor and environmental laws, reported higher carbon emissions, and had worse outcomes for a range of other objectives — including compliance with labor and environmental laws — than ...
Why is ESG risky? ›
Environmental, social, and governance (ESG) risks are the potential negative impacts that a company's operations or supply chain can have on the environment, society, and its own governance practices. ESG risks can have a significant impact on a company's financial performance, reputation, and ability to operate.
Many issues come under the ESG umbrella, including complaints concerning the organisation's environmental impact, allegations of misreporting or conveying a false impression of environmental and sustainability credentials (greenwashing), tax evasion and corruption, human rights abuses in the supply chain and bullying, ...
Why are ESG funds falling? ›
“When someone's looking at an environment of high interest rates, it can make activities like building out renewable energy less profitable,” she said. So part of the ESG retreat is just investors chasing higher returns elsewhere. The other part is politics.
How do investors benefit from ESG? ›
This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.
What percent of investors invest in ESG? ›
89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.
Do investors value ESG? ›
Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.
What's behind the ESG investment backlash? ›
Backlash in the U.S. and EU
Several Republican-governed states blacklisted money managers with public sustainability commitments and introduced legislation aimed at limiting the ability of financial institutions to include ESG considerations in investment strategies.
What are the outflows of ESG funds? ›
Outflows persisted in both active (-8.3bn) and passive (-$5.1bn) ESG funds. Equity ESG funds suffered the greatest outflows (-14.5bn) followed by allocation funds (-$220m) and commodities (-$97m). Fixed income is the only category that has had continued inflows since the market selloff in 2022.
