Global investors are turning their backs on sustainability-focused stock funds, as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars of assets.
According to Barclays research, clients have pulled a net of $40bn out of environmental, social, and governance (ESG), equity funds in this year. This is the first time that flows have been negative. The redemptions have been spread across all major regions, including a monthly net outflow record of $14bn.
The outflows are a major reversal in a sector where investors had flocked in recent years. Attracted by the promise that these funds could change the world while making as much money — or more — than traditional stock portfolios.
Pierre-Yves Gauthier is the head of strategy at AlphaValue and co-founder. He compared this sector to the technology bubble that burst back in 2000. He said that “ESG is a dotcom-type hype 20 years after it happened and has now passed.”
Several funds have suffered from the low performance of clean energy sectors, and have missed out on high returns by fossil fuel companies they avoided.
The sector has also been hit by scandals such as the one that involved the German asset manager DWS, which agreed to to pay $19mn in a greenwashing investigation to the US Securities regulator after being accused of “materially false statements”.
ESG investments have been attacked by Congressional Republicans as “radical political activism masquerading under the guise of 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.
Larry Fink, BlackRock’s CEO, said last year that he no longer used the term ESG “because it has been completely weaponised”.
According to Barclays’ research, based on EPFR data, US investors withdrew $4.4bn in April from ESG equity fund.
BlackRock’s US ESG fund has seen its assets drop from $25bn to $12.8bn since May. The company removed the ESG fund last year from its popular “60/40 model” portfolio of stocks, bonds and other investments.
Morningstar reported in May that Parnassus core equity, the largest US sustainable fund with assets of $28,4bn, has “been one of 10 worst performers in terms of flow for two straight years”.
“US ESG flow is negative. It is probably a testament to what is going on in the US, with a very politicised and polarised debate surrounding it, which has frozen behaviour on this front,” said Elodie Laugel, chief responsible investments officer at Amundi. Amundi is the second largest sustainable fund manager worldwide after BlackRock.
The latest data shows that ESG’s traditionally stronghold, Europe, is now experiencing a decline. In April, ESG equity funds in the region saw outflows of $1.9bn.
The global investors’ appetite for ESG reached its peak at the end 2021 just before Russia invaded Ukraine. This led to an increase in gas prices and stocks of fossil fuels. In 2022, central banks raised interest rates sharply to combat inflation. This hurt high-growth tech companies, which ESG funds typically prefer over oil and gas.
According to a JPMorgan report published in May, global sustainable equity fund returns over the past year were 11 percent, compared to 21 percent for conventional stock funds.
“These funds have not performed well over the last two years, and this is evident.” . . Some investors have been discouraged,” said Hortense Biy, Morningstar’s global director of research on sustainability.
Jamie Franco, global director of sustainable investments for asset manager TCW said that some funds launched between 2020-21 “probably went a little out too quickly and] probably took advantage [of some ESG marketing sentiment].
She added that some investors continue to pursue ESG objectives in separate managed accounts, which are not captured by fund flows figures.
Barclays reports that ESG bond funds had inflows for 13 consecutive months up until April. ESG bond funds have made $22bn in revenue this year.
Todd Cort is a Yale School of Management professor who specialises on sustainable investing. He said that while the ESG label may become less popular, the underlying challenges of social and environmental issues will remain.
He said that investors would be making a greater effort to understand social and environmental risks. “This will continue to increase, and I don’t really care if it continues to be called ESG.”
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