ESG-Focused Funds Shrug Off Criticism, Survey Says

December 08, 2022

Exchange-traded fund companies are issuing more environmental, social and governance-focused funds, despite pushback from politicians and investors who claim the label is restrictive and crimps returns, a survey has found. 

The number of ESG-focused ETF and mutual funds rose 23% to 813 through the first half of the year, Boston-based financial researcher Cerulli Associates said in a study published this month. The firm expects ESG-focused ETFs will reach $564.7 billion in assets by the end of 2027. 

Still, while the number of funds rose, total assets in ESG-focused funds fell 20% through the middle of the year from the $768 billion recorded at the end of 2021, due to slumping stock prices. 

Flows into ESG funds reached $5.8 billion at the year’s midpoint, a large decline from the $59.1 billion in last year’s first half. 

New funds continue to be issued despite the ESG label coming under repeated fire for prioritizing investments that favor politics over profits, and has been the subject of mounting scrutiny from Republicans and Democrats alike.  

No Change in Strategy 

“Political noise” isn’t prompting a strategy change among issuers and managers of ESG products, report author Michele Giuditta told ETF.com. 

“Recent political pressure has not deterred most firms,” said Giuditta, Cerulli’s director of institutional practice. “Managers are committed to ESG, and I don’t think this is going to change their plans.” 

In a recent backlash against ESG, Florida announced this month it will divest $2 billion in assets currently under management by BlackRock Inc., due to the firm’s sustainable investment policies. BlackRock’s iShares is the world’s biggest ETF issuer.  

In a similar move, Missouri and Louisiana, both of which, like Florida, are headed by Republican administrations, pulled $500 million and $794 million, respectively, from the firm due to ESG practices. 

The report also noted solid growth in the overall ETF industry, as total assets rose 7.1% to $6.3 trillion in October. Investors poured $86.7 billion into passive and index-tracking products. 

ETF product launches surpassed the number of mutual fund launches in the ESG sector, according to the report. There were 26 ETF launches versus 14 mutual fund launches in the first half of the year, through June 30, according to Giuditta. 

“Issuers and investors are pivoting to ETFs because of their lower cost, ease of use and offering of model portfolios,” she said. 

 

Contact Zoya Mirza at [email protected] 

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