ESG Outflows May Signal Turning Tide For ETFs

Investors pulled hundreds of millions of dollars from ESG funds in the second quarter, but financial advisors are still warming to the idea of investing in sustainable funds in the future.  

ESG-focused funds, including exchange-traded and mutual funds, lost $635 million in assets in the U.S. in the second quarter alone, marking the third consecutive quarter of outflows and adding to a total withdrawal of $11.4 billion from these funds over the past year. Some analysts had even called for a major course correction. 

The numbers come from a recent Morningstar report that highlights a tumultuous year for ESG that saw asset managers shy away from the investment strategy, even stripping the label from their funds. The iShares ESG MSCI USA Leaders ETF (SUSL) and the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) were among the casualties, each shedding more than $2 billion during the period alone, according to the report. 

While ominous for ESG, the trend may be easing. Second-quarter outflows paled in comparison to the historic losses during the previous two quarters of more than $5 billion each. Is the worst over? 

“Although investors have largely pulled out of sustainable funds over the past year, some asset managers continue to see prospects for growth,” according to the study.  

ESG Exchange-Traded Funds

BlackRock Inc. and DWS Group both launched climate-focused ETFs, and quickly catapulted to the top two spots with the iShares Climate Conscious & Transition MSCI USA ETF (USCL) netting $2.3 billion since its launch in early June, and the Xtrackers MSCI USA Climate Action Equity ETF (USCA) reaching the same amount.  

In fact, more than nine in 10 wealth managers expect to increase their exposure to clean energy in the next 12 months, according to an October 2022 report from HANetf, a European white-label ETF provider.  

Asset managers may be taking notice. Twenty-six new sustainable funds came to market in the quarter, down from the record 44 in 2021’s fourth quarter, but up from the latter half of 2022, according to the report. Fidelity Investments accounted for more than half of the new launches, including a sustainable target-date strategy that opened to investors in May.  

“The future of ESG investing in the U.S. target-date landscape has been on unsteady footing since 2020,” according to the study, referring to a Department of Labor ban on ESG strategies in defined contribution plans. “When President Joe Biden entered office in 2021, the tone from the DOL turned more favorable, but the debate is far from over.” 

Note: Corrects second paragraph to say that total outflows included mutual funds and exchange-traded funds.

Contact Sean Alloca at [email protected]