Global investors are turning their backs on sustainability-focused equity funds as poor performance, scandals and attacks from US Republicans have dented enthusiasm for the much-hyped sector that has attracted trillions of dollars in assets.
Clients have withdrawn a net $40 billion from environmental, social and government (ESG) equity funds this year, according to Barclays research, the first year in which flows have trended negatively. Buybacks, which include record monthly net outflows of around $14 billion in April, were ramped up in all major regions.
The outflows mark a significant turnaround for a sector that investors have flocked to in recent years, attracted by claims that such funds could help change the world for the better while making as much — or even more — money than traditional stock portfolios.
Pierre-Yves Gauthier, head of strategy and co-founder of AlphaValue, an independent research firm based in Paris, likened the industry to the tech bubble that burst in 2000. passed,” he said.
Many funds have been hit by poor performance in sectors such as clean energy, while missing out on high returns from fossil fuel companies they actively avoided.
Scandals such as that of German asset manager DWS – which agreed to pay $19 million to the US securities regulator in a green probe after being accused of “materially misleading statements” – have also hit the sector’s appetite.
Congressional Republicans have attacked ESG investing as “radical partisan activism masquerading as corporate governance.” The Republican-controlled House of Representatives has subpoenaed BlackRock and rival State Street as part of an investigation into the sector, which it says may be violating antitrust laws.
BlackRock’s Larry Fink said last year that he no longer uses the term ESG “because it has been completely weaponized.”
US investors pulled $4.4 billion from ESG equity funds in April amid the backlash, according to a Barclays survey based on data from fund tracker EPFR.
Assets at America’s largest ESG fund, BlackRock, have halved from $25 billion at their peak in late 2021 to $12.8 billion in May. Last year, the company dropped the ESG fund from its popular “60/40” stock-bond model portfolio.
The largest U.S. sustainable fund, Parnassus Core Equity, which has $28.4 billion in assets, “was one of the top 10 losers in terms of flows for two consecutive years,” Morningstar said in a May report.
“US ESG flows are negative and it’s probably a testament to what’s happening in the US context with a very polarized and politicized debate around it that has frozen behavior on that front,” said Elodie Laugel, chief investment officer. at Amundi, which is the second largest manager of sustainable funds in the world after BlackRock.
But the latest data highlights that the retreat from ESG has hit Europe, the strategy’s traditional stronghold. Outflows of ESG equity funds in the region totaled $1.9 billion in April.
Global investor appetite for ESG peaked in late 2021, just before Russia invaded Ukraine, sending gas prices and fossil fuel stocks soaring. Meanwhile, a sharp rate hike by central banks in 2022 to fight inflation has punished high-growth technology companies, which are typically favored by ESG funds over oil and gas companies.
Over the past 12 months, global sustainable equity funds returned 11 percent, compared with 21 percent for conventional equity funds, according to a JPMorgan report in May.
“It is clear that the performance of these funds has not been good in the last two years. . . has deterred some investors,” said Hortense Bioy, global director of sustainability research at Morningstar.
Jamie Franco, global head of sustainable investing at asset manager TCW, hinted that some ESG products may not have delivered on their promise, saying some funds launched in 2020-21 “probably left too quickly. [and] likely tapped into some ESG marketing sentiment”.
But she added that some investors continued to track ESG targets in separately managed accounts, which were not necessarily captured by fund flow data.
While withdrawals hit ESG equity funds, ESG bond funds had 13 direct inflows through April, according to Barclays. ESG bond funds earned $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 be increasingly falling out of use, the underlying social and environmental challenges remain.
“Behind the scenes, there will be a significantly greater effort by investors to understand environmental and social risks,” he said. “That’s going to continue to grow, and I really don’t care if we keep calling it ESG.”