United States: Investors Pull Money From ESG Funds

It has been reported--based upon an analysis by Morningstar--that "[i]nvestors pulled $5 billion from U.S. sustainable funds in the fourth quarter [of 2023] for a total of $13 billion last year [2023]." According to the same report, this is the "first calendar year of outflows" for "U.S. sustainable funds" "since Morningstar began keeping track more than 10 years ago." Of course, observing this outflow of funds does not address the critical question: why are investors pulling money from ESG funds?

Morningstar and press reports have proffered a few potential explanations, including: (1) "lagging performance"; (2) "continued political scrutiny in the United States"; (3) and a particularly bad year for one specific fund. While it is impossible to ascribe with absolute certainty the proper balance among these (and other) explanations, there are a few things about the report that should be noted. First, as stated in the report, sustainable funds underperformed conventional funds over the past year (a median of 20.8% for sustainable funds vs. 23.8% for conventional funds), which could lead to withdrawals from ESG funds in the interest of nothing more than greater returns. Second, more than $9 billion of the $13 billion withdrawn from sustainable funds can be attributed to a single fund--indeed, if this fund were excluded from the analysis, passive U.S. sustainable funds would have gained $1 billion over 2023. So, it is altogether possible that the headline result--a decline in the amount invested in sustainable funds--is a mere artefact of a particular year, and does not necessarily support a more far-reaching explanation with deeper implications for ESG investing. Still, the fact that sustainable fund closures outpaced launches in the fourth quarter of 2023--seven new sustainable funds launched (and one existing fund re-classified as a sustainable fund) while sixteen sustainable funds were closed--does serve as a countervailing factor indicating a broader trend in the market.

Nonetheless, one explanation for the decline in monies invested in ESG funds deserves particular scrutiny: the political climate in the United States. Over the past few years, there has been a concerted effort by many politicians, business leaders, and media figures to push back against the growth of ESG investing. This resistance has taken many forms, including lawsuits, state regulations, and executive action. It is altogether possible that this apparently more hostile environment for ESG investing has contributed to a decline in the monies devoted to ESG investing, even if specific withdrawals cannot be directly tied to particular laws or regulations. Rather, this could simply reflect a changing climate and a desire by companies to avoid any controversy associated with ESG investing.

The money flowing out of E.S.G. funds has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red-state boycotts and boardroom debates. The investing strategy has become increasingly politicized after being used by companies to address environmental, social, and governance issues among their employees, customers and other stakeholders. In a sign of the times, the phrase has been scrubbed from the World Economic Forum's official program in Davos, after being on the agenda in previous years. Investors pulled $5 billion out of E.S.G.-focused "sustainable" investment funds last quarter, according to a new report by Morningstar. The withdrawals occurred despite a wider market rally at the end of 2023.

https://www.nytimes.com/2024/01/19/business/dealbook/davos-trump-biden-election.html?