ESG funds have ‘worst withdrawal month ever’

British investors dumped funds badged as sustainable or ethical at their fastest pace ever last month, according to a snapshot of fund-buying behaviour.

There was a net outflow of £304 million in May from so-called ESG equity funds — investment products weighted towards companies meeting environmental, social or governance rules — with more investors redeeming than buying into them. ESG has been a potent selling tool for the funds industry, with a net £6.7 billion injected into ESG-badged funds in 2022, £11.2 billion in 2021 and £6.7 billion in 2020. Most months have experienced strong net purchases by end-investors.

Calastone, the global funds network that compiled the industry-wide figures, said: “ESG equity funds suffered their worst ever month, shedding £304 million of capital. May was only the second month during which investors have been net sellers in this sector in more than five years.”

The retreat appears to have been partly about pulling out of all kinds of equities as much as a withdrawal from ESG specifically as investors sought the haven of money market funds amid interest rate wobbles and the aftermath of the Silicon Valley Bank collapse. Net flows into all types of equity funds slowed to £303 million in May, down from £1.4 billion in April and £960 million in March.

Edward Glyn, Calastone’s head of global markets, said: “Yes, we’ve seen a dampening of enthusiasm for ESG funds in the last month, but it is too soon to predict a structural shift [in investors’ behaviour]. I don’t think it is going to be an end to the ESG success story.”

ESG-badged funds generally have produced sub-par performances in the past 18 months because they tend to be underweight in oil and gas stocks, which have generated very strong returns. An above-average weighting to technology stocks has hurt some of them, too, although that effect has reversed in recent months as many of America’s biggest technology stocks have staged a dramatic recovery.

Another factor in reducing demand for ESG-badged funds could be growing scepticism among some investors about the environmental claims made for them. It was possible that stories about so-called greenwashing were having an impact, Glyn said.

The only other month where investors were net sellers of ESG funds was September last year, when a net £126 million was withdrawn.

The new figures show the strongest net inflows into money market funds since the September mini-budget market upheaval, with a net £419 million injected into the category. Money market funds invest in government bonds with very short maturities and are seen as low-risk. The May net outflow for ESG funds compared with net inflows in April and March of £583 million and £218 million, respectively.

Investors’ appetite for UK-badged funds remains depressed. Investors pulled a net £583 million from the category in May, the 24th successive month in which they have ditched UK funds.

Brexit, political instability and the UK’s poor productivity record have all been suggested as reasons, but Glyn said some UK-badged funds had performed strongly recently and some selling was from investors “capitalising on their winnings”.

Calastone connects fund managers with financial advisers and wealth managers, processing £250 billion of flows each month, and bases its estimate on this up-to-date data.