Environmental, Social, and Governance (ESG) funds, which once surged in popularity, faced significant losses in the third quarter of 2023, according to Morningstar, a prominent American financial services and research firm headquartered in Chicago, Illinois.
Investment funds with a focus on sustainability and ethical goals experienced withdrawals amounting to $2.7 billion during the third quarter of 2023. This period saw a higher number of ESG funds closing down than opening, reflecting the diminishing demand among investors. Notably, ESG funds suffered more substantial losses compared to their non-ESG counterparts, resulting in four consecutive quarters of outflows. Regulatory scrutiny and concerns about returns have contributed to investors’ waning interest in ESG funds.
During the last three months, ESG funds saw a decline in value of 0.85%, while general investment funds lost only 0.02%, as reported by Morningstar. Interestingly, more traditional funds were established during the third quarter than those that closed. Morningstar’s data reveals that three new ESG funds were launched, while 13 closed within the same period.
Morningstar Researcher Alyssa Stankiewicz observed that “for the first time in recent history, sustainable fund departures outpaced arrivals.” This shift marks a significant change in investor sentiment compared to the boom experienced by ESG funds in 2021.
One key reason behind this declining appeal of ESG funds among American investors is the increased regulatory scrutiny they face, as noted by Reuters. Republican politicians have accused these funds of engaging in boycotting practices against certain industries, which they argue can have negative consequences on retirees’ savings. While ESG funds claim to support ethical practices, such as reducing greenhouse gas emissions and enhancing workplace diversity, some investors have grown wary of the political and economic implications of these investments.
The prominent investment management company BlackRock exemplified the challenging environment for ESG funds. In the third quarter, BlackRock decided to shut down two smaller ESG funds, each with assets in the millions, after three years on the market. This decision reflects a shift in strategy as BlackRock CEO Larry Fink announced in June that the term “ESG” would no longer be used within the firm. Fink cited the term’s political connotations as a reason behind this change. In his statement at the Aspen Ideas Festival, Fink expressed being “ashamed of being part of this conversation.”
As ESG funds grapple with dwindling investor interest and increased regulatory scrutiny, their future trajectory remains uncertain. However, the recent trend suggests a potential reshaping of the investment landscape, as investors seek alternatives or more traditional approaches to financial growth.
