Investors pull billions from sustainable funds amid political heat

THE money flowing out of funds that invest in companies with environmental, social and governance (ESG) principles 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 politicised 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 from the World Economic Forum’s official programme in Davos, Switzerland, after being on the agenda in previous years.

Investors pulled US$5 billion out of ESG-focused “sustainable” investment funds last quarter, according to a new report by Morningstar. The withdrawals came amid a wider market rally at the end of 2023.

For the full year, US$13 billion was pulled from ESG funds. All in all, it was the “worst calendar year on record”, wrote Alyssa Stankiewicz, Morningstar’s director of sustainability research.

Even the bulls are changing their narrative. Larry Fink’s BlackRock, a long-time champion of the ESG investment strategy, has grown quieter on the issue as political tensions rise, especially among Republican lawmakers. The brunt of the outflows last year were from a single iShares ESG fund managed by BlackRock.

The ESG market is still worth trillions, attracting a wide swath of investors looking for solid returns and motivated by a cause they believe in. The median return for the larger ESG funds was a decent 20.8 per cent last year, according to Morningstar, although that trailed the S&P 500.

SEE ALSO

Issue 84: Coal production heats up; accounting for nature

Temasek-backed Climate Impact X lays off ‘a few’ employees

Sustainability reporting: leading by example

But investors’ returns are off their 2021 peak, hurt by rising interest rates and the lack of regulation that would better define which stocks qualify as ESG, Morningstar noted. It added that the political heat is also having a chilling effect: Last month, House Republicans stepped up their scrutiny of fund giants such as BlackRock and State Street over their ESG investing strategy.

Wall Street has responded. Fund managers liquidated 16 such funds last quarter and opened seven, the second consecutive quarter in which closures outpaced newcomers.