Money flowing out of funds that invest in companies with environmental, social and governance principles has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red state boycotts and debates in boardrooms.
The investment strategy has become increasingly politicized after being used by companies to address ESG issues among their employees, customers and other stakeholders. In a sign of the times, the phrase has been scrubbed of the official program of the World Economic Forum in Davos, Switzerland, after having been on the agenda in previous years.
Investors withdrew $5 billion from โsustainableโ ESG-focused investment funds last quarter, according to a new report from Morningstar. The withdrawals came amid a broader market rally in late 2023.
Throughout the year, $13 billion was withdrawn from ESG funds. Ultimately, it was the โworst calendar year on record,โ wrote Alyssa Stankiewicz, director of sustainability research at Morningstar.
Even the bulls are changing their narrative. Larry Fink's BlackRock, a long-time advocate of ESG investment strategy, has grown quieter on the issue as political tensions rise. especially among Republican legislators. Most of the outflows last year came from a single iShares ESG fund managed by BlackRock.
The ESG market is still worth trillions and attracts a wide range of investors who are looking for solid returns and are motivated by a cause they believe in. The average return of the largest ESG funds was a decent 20.8 percent last year, according to Morningstar, although it lagged. the S&P 500.
But investor returns are below their 2021 peak, hurt by rising interest rates and a lack of regulation to better define which stocks qualify as ESG, Morningstar noted. He added that the political heat is also having a chilling effect. Last month, House Republicans stepped up scrutiny of fund giants such as BlackRock and State Street on their ESG investment strategy.
Wall Street has responded. Fund managers liquidated 16 of these funds last quarter and opened seven, the second consecutive quarter in which closings exceeded those of newcomers.
