Investors are pulling billions from sustainable funds amid political heat

Science

Money flowing from funds investing in companies with environmental, social and governance principles has gone from a trickle to a flood, as investors sour on a sector hit by greenwashing concerns, red state boycotts and debates in the 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 sentence has been scrubbed from the official program of the World Economic Forum in Davos, Switzerland, after being on the agenda in previous years.

Investors pulled $5 billion from ESG-focused 'sustainable' investment funds last quarter a new report from Morningstar. The pullbacks occurred amid a broader market rally in late 2023.

For the full year, $13 billion was pulled from ESG funds. Overall, it was the “worst calendar year ever,” wrote Alyssa Stankiewicz, Morningstar's director of sustainability research.

Even the bulls change their story. Larry Fink's BlackRock, a longtime champion of the ESG investing strategy, has grown quieter on the issue as political tensions rise. especially among Republican lawmakers. 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 large group of investors looking for solid returns and motivated by a cause they believe in. The average return for the larger ESG funds was a decent 20.8 percent last year, according to Morningstar, although that lagged. the S&P500.

But investor returns are not yet at their peak in 2021, due to rising interest rates and the lack of regulations that could better define which stocks qualify as ESG, Morningstar noted. It added that the political heat is also having a chilling effect. Last month, Republicans in the House of Representatives have stepped up their investigation into fund giants such as BlackRock and State Street on their ESG investment strategy.

Wall Street has responded. Fund managers liquidated 16 such funds and opened seven last quarter, the second quarter in a row in which closures outpaced new entries.