ESG ETFs Buffeted by Volatile Politics and Markets

Funds flowing into U.S. environmental, social and governance exchange-traded funds plummeted at the end of last year as markets fluctuated and the trend toward putting sustainability on equal footing with profits grew increasingly politicized. 

Sustainable funds in the U.S.—including ETFs and mutual funds—shed $6.2 billion in last year’s fourth quarter, the biggest outflows from the products globally, according to Morningstar Direct. It was the biggest drop in over five years and occurred in a year when the S&P 500 sank 18%. In comparison, European investors added $40 billion in inflows into sustainable funds during the same period.  

“The biggest driver in declining interest over the past seven quarters is definitely the broader market environment,” said Alyssa Stankiewicz, ESG manager research analyst for Morningstar Research Services.  

Sustainable funds underperformed compared to their conventional counterparts by as much as 1.3% during the fourth quarter, she noted.  

Source: Strategas  

Within ETFs, ESG-labeled funds had outflows of $2.1 billion in the last three months of 2022, compared to $6.1 billion of inflows in the year-ago quarter, according to data from research firm Strategas Securities. 

The worst performer among all U.S. ESG funds in the quarter was the iShares ESG Aware MSCI USA ETF (ESGU), which bled $1.8 billion in the fourth quarter alone, according to Morningstar Direct.  

ESG funds’ poor performance may be due to a lack of clarity in what defines the so-called sustainable investment vehicles, Todd Sohn, ETF strategist at New York-based Strategas, told ETF.com.  

“What defines an ESG stock still seems up in the air,” Sohn wrote in emailed comments, adding that investors’ returns are often similar to the S&P 500, while they pay up to five times the amount in fees.  

“As for ESG overall—whether inflows or outflows—the structural issues with the products haven’t been fixed. That seems like a bad deal, especially in what is a very investor friendly industry/vehicle,” he added. 

Also weighing on flows is increasing politicization of ESG investing, Stankiewicz said, as asset managers get lambasted by the political right and left. New York-based BlackRock Inc., whose iShares unit is the largest ETF issuer, has been a frequent target of some groups, who say they do too much ESG, while others say not enough is done.  

Last year, $1 billion was pulled from BlackRock from Republican states including Louisiana, Utah and Arkansas regarding ESG concerns, according to the Financial Times.  

New York City Comptroller Brad Lander also recently condemned BlackRock for the “fundamental contradiction” between BlackRock’s statements and actions, while 19 Republican Attorneys general earlier this year accused the firm of collaborating with climate activists instead of siding with clients. 

Contact Shubham Saharan at [email protected]