Investors have shied away from funds that claim to be sustainable and/or socially responsible, having become more aware of the claims made by asset managers.
Morningstar Direct data shows that only six funds, citing environmental and social factors, launched in 2023’s second half, compared to 55 in 2023’s first half. The average annual number of funds between 2020 and 2012 was almost 100.
ESG labelling has also been removed in some fund names. According to a US Securities and Exchange Commission filing, the asset manager Abrdn intends to remove the phrase “sustainable leader” from two fund names in February. Morgan Stanley and UBS dropped ESG labels from certain funds last year.
ESG strategies are gaining more attention among regulators, politicians, and clients.
According to Morningstar, ESG broad market funds outperformed conventional counterparts on average in 2019, 2020 and 21 but fell in 2022 and in 2023.
Alyssa Stanley, Morningstar’s associate director for sustainability research, said: “It is likely performance prospects.” We know that, sadly, investor behaviour — reallocating funds for performance — tends more to follow than precede performance.
The performance of ESG funds has not been the sole factor that has discouraged investors. Republicans in the US have criticized financial firms because they are hostile to fossil fuels, and “too woke”, by supporting social commitments like diversity, equity, and inclusion.
Morningstar data shows that, in addition to the launch of sustainable funds, over 120 other funds have either been renamed, or updated to reflect ESG factors, between January 2018 to late last year.
Stankiewicz acknowledged ESG funds have struggled in recent months, but noted that the majority of ESG outflows for 2023 came from one ETF. BlackRock’s iShares ESG-Aware MSCI USA ETF (commonly known as ESGU) lost over $9bn of assets when it was removed as part of a BlackRock portfolio model.
According to an asset manager’s filing, the two Abrdn fund will continue to consider “the most important” ESG in their selection of securities after dropping the Sustainable Leaders label. However, they will place more emphasis on factors like business model durability and the financial strength. The label will remain on the two other Abrdn sustainable leaders funds.
Abrdn stated that the removal of “sustainable leaders” from the names is not related to a rebrand, but rather a change in strategies. “Abrdn offers other sustainable strategy fund names that include the word’sustainable.’
In September, the SEC updatedrules to require that funds invest at least 80 percent of their assets in accordance with names and advertising ESG factors. Asset managers have two years to comply.
UBS stated that “in anticipation of evolving regulations we renamed 2 US sustainable money markets funds”.
Morgan Stanley has not responded to a comment request.