Global investors are turning their backs on equity funds focused on sustainability, as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has attracted trillions of dollars in assets.
Clients have withdrawn a net $40bn from environmental, social and governance (ESG) equity funds this year, according to research from Barclays, the first year flows have been negative. Redemptions, which include a record monthly net outflow of about $14 billion in April, have been widespread across all major regions.
The exits mark a significant upheaval for a sector that investors have flocked to in recent years, attracted by the claim that such funds can help change the world for the better while making just as much – or even more – money. than traditional stock portfolios.
Pierre-Yves Gauthier, head of strategy and co-founder at AlphaValue, an independent research firm based in Paris, compared the sector to the tech bubble that burst in 2000. “ESG was a kind of dotcom advertising 20 years later and now it has passed,” he said.
Many funds have been hit by the poor performance of sectors such as clean energy, while they have also missed out on strong returns from fossil fuel companies they actively avoided.
Scandals such as that at German asset manager DWS – which agreed to pay $19 million to the US securities regulator in a “greenwashing” investigation after being accused of “materially misleading statements” – have also hit appetite for the sector.
Congressional Republicans have attacked ESG investing as “radical partisan activism masquerading as responsible corporate governance.” The Republican-controlled House of Representatives has subpoenaed BlackRock and rival State Street as part of an investigation into the sector, which they say may violate antitrust laws.
BlackRock’s Larry Fink said last year that he no longer used the term ESG “because it was completely weaponized.”
Amid the backlash, US investors pulled $4.4 billion from ESG equity funds in April, according to Barclays research, which is based on data from fund tracker EPFR.
Assets in BlackRock’s largest US ESG fund have halved from $25 billion at a peak in late 2021 to $12.8 billion in May. Last year, the company removed the ESG fund from its popular “60/40” model portfolio of stocks and bonds.
The largest U.S. stable fund, Parnassus Core Equity, which has $28.4 billion in assets, “has been one of the top 10 losers in terms of flows for two consecutive years,” Morningstar said in a report in May.
“US ESG flows are negative and perhaps it’s a testament to what’s happening in the US context with a very polarized and politicized debate around it, which has frozen behavior on that front,” said Elodie Laugel, the chief responsible for investments. at Amundi, which is the world’s second largest stable fund manager after BlackRock.
But the latest data points to the pullback from ESG reaching Europe, the strategy’s traditional stronghold. ESG equity fund outflows in the region were $1.9 billion in April.
Global investor appetite for ESG peaked in late 2021, shortly before Russia invaded Ukraine, leading to a surge in gas prices and fossil fuel reserves. Sharp interest rate hikes by central banks in 2022 to fight inflation, meanwhile, punished high-growth technology companies, which are typically favored by ESG funds over oil and gas businesses.
Over the past 12 months, global equity funds returned 11 percent, compared with 21 percent for conventional stock funds, according to a May report from JPMorgan.
“It is clear, the fact that the performance has not been good for these funds during the last two years. . . has discouraged some investors,” said Hortense Bioy, global director of sustainability research at Morningstar.
Suggesting that some ESG products may have failed to deliver on their promise, Jamie Franco, global head of sustainable investing at asset manager TCW, said some funds launched in 2020-2021 “probably ran out a bit too quickly [and] perhaps benefited from a sense of ESG marketing”.
But she added that some investors continued to pursue ESG goals in separately managed accounts, which were not necessarily captured by fund flow figures.
While withdrawals have hit ESG equity funds, ESG bond funds have had 13 straight months of inflows through April, according to Barclays. ESG bond funds have reached $22 billion this year.
Todd Cort, a professor at the Yale School of Management who specializes in sustainable investing, said that while the ESG label may increasingly fall out of favor, the underlying social and environmental challenges will remain.
“Behind the curtain, there will be a lot more effort by investors to understand environmental and social risks,” he said. “It’s going to continue to grow, and I actually don’t really care if we keep calling it ESG.”
