The world’s largest asset managers have been launching sustainable funds for several years in an attempt to capitalize on the growing interest in ESG investing. These funds then invest in companies that try to achieve a positive impact on society and the environment, but at the same time, of course, generate profit for their investors. ESG funds have become popular in recent years mainly due to their emphasis on sustainability and ethics.
Companies that receive money from such funds can, for example, be engaged in the use of green technologies, climate protection, water resources or meet strict social criteria.
However, at least this year, the trend may seem to be slowing down. Prominent asset managers, such as BlackRock and State Street, are currently not only under pressure from some American politicians, but are also being criticized by investors themselves.
ESG – environmental, social and corporate governance
Companies’ approach to responsible business and, to a large extent, their attractiveness for investors is currently assessed mainly by the ESG point of view, which, in contrast to classic investment points of view, which focus only on the financial performance of companies, evaluates non-financial aspects of business, namely in three categories: environmental sustainability, social sustainability and sustainable management. According to Morningstar, one of the world’s leading providers of independent investment research, global demand for sustainable investments reached nearly two trillion dollars last year.
At the end of June this year, a total of 656 sustainable funds were offered in the United States, while the number of those canceled is still increasing compared to previous years, writes Bloomberg, referring to data from the financial company Morningstar.
Its data shows that 26 sustainability-focused funds have closed in the US so far in 2023, which is more than in the previous three years combined. In addition, investors withdrew more money from these funds than they invested in them in the first half of the year.
Demand has cooled
“Last year and this year, we saw a noticeable drop in demand,” Alyssa Stankiewicz, associate director of sustainability research at Morningstar, told Bloomberg. This is explained, among other things, by the fact that ESG funds focused on sustainable investing recorded not very attractive returns.
“Some sustainable funds did not do well last year at all. This is due to their investment strategies, which did not meet expectations last year, while other funds had trouble attracting new investors and increasing assets under management,” Stankiewicz added.
Money flowed into sustainable investment funds mainly in 2020 and 2021, when many fund managers liked to add the words “ESG” or “sustainable” to the names of existing funds, Bloomberg describes. Some foreign agencies write about the fact that sustainable funds in the US have unleashed something like a culture war.
A number of Republicans also follow this line, and they are certainly not sparing in their criticism of ESG funds. Some American politicians call them a form of hypocrisy, manipulation or a shift from investment to marketing.
At the same time, he argues that many companies use social and environmental issues only to increase their popularity and profits without actually contributing to positive change. In Europe, regulators are already tightening labeling rules in an effort to crack down on any exaggerated claims.
The term “ESG” itself has more or less stopped being used in his statements by the CEO of the billion-dollar manager BlackRock Larry Fink. According to him, this term has become too politicized. Instead, they talk more often about investments linked to the transition to a low-carbon economy.
Lynn Forester de Rothschild, who heads the family investment company EL Rothschild, recently recalled in an interview with Bloomberg that the term ESG was created essentially by accident during one of the speeches at the United Nations in 2005, but then it took on a life of its own and became him a mere “product”.
“Some people and companies now think that if they flaunt the term, it will give them virtue and these are the reasons why it is good to throw the term ESG in the trash. What companies do we want to invest in, what companies do we want to work for? These are the key questions and issues, not ESG labels,” said Rothschild.
However, criticism of sustainable funds does not only revolve around the aforementioned topics. Part of the critical votes is also aimed at their performance, i.e. whether they are making money. A few years ago, ESG funds were presented to investors as “winners” of the future, bringing investors higher returns than classic “unsustainable” funds that were about to go out of fashion. But this assumption has not been proven even after several years, notes the Financial Times.
“The performance of ESG funds is lackluster, with no evidence that sustainable funds outperform conventional funds,” said Felix Goltz, director of research at Scientific Beta, according to the Financial Times.
This, he says, contrasts with some views that assume that ESG investments should automatically perform better because they invest in “better” and more sustainable companies.
“Simple claims that ESG funds will be more successful should never have been made. It is based on short time series with insufficient control. Unfortunately, these claims are often taken uncritically,” adds finance professor Alex Edmans from London Business School.
Scientific Beta compiled data on all U.S. equity exchange-traded funds (ETFs) headquartered in North America or Europe that Bloomberg classified as “socially responsible,” or ESG, from 2012 through the end of 2022. These ETFs had assets of $97.6 billion at the end of that period, peaking at $114 billion in December 2021.
The analysis showed that the average annual returns of these ETFs were 0.2 percentage points lower than comparable non-ESG ETFs. “In the past decade, the sustainable investment portfolio has not surpassed its benchmarks (comparative indicators – editor’s note). Revenues, on the other hand, were slightly lower,” the analysis states. The only exception was 2020.