ESG ETFs Struggle to Keep Investors on Board

You don’t hear much about ESG investing these days, but that doesn’t mean it is vanishing.

The financial services industry, being the savvy marketing and production complex that it is, isn’t likely to abandon the opportunity to tap into investors' emotions on the promise of righteousness coupled with outperformance.

Investors, meanwhile, have been expressing a level of exasperation with investments sold under the banner of environmental, social, and governance causes.

There is the politics, for sure. Few areas of wealth management have become as politicized as ESG investing. But a closer look at the assets flowing in and out of ESG ETFs suggests even the strongest proponents might have a finicky palette for ESG investments.

Consider the 25 ETFs with the most first-day asset flows, prior to the recently launched spot bitcoin ETFs.

Of those 25 ETFs introduced between May 2000 and June 2023, nine were categorized by Bloomberg Intelligence as ESG funds.

ESGs That Declined

The fact that 36% of the first-day flow leaders are ESG funds says a lot about the bandwagon mentality of ESG investors. The flipside of those big first days, however, is that the assets in six of those nine funds are now below where they were at the end of their first trading day.

By comparison, only three of the 16 non-ESG funds on the list of 25 are below the asset levels from their first day of trading.

And it’s not necessarily a performance issue distinguishing the ESG and non-ESG ETFs in this group of 25.

According to the data compiled by Andy Martin, president of 7Twelve Advisors, 44% of ESG ETFs were above their benchmark from inception through Feb. 12. That’s not far off the non-ESG ETF group where 50% of the funds were beating their benchmarks.

Martin, a practicing Catholic, draws a parallel between ESG investing and investing based on Catholic values.

“If you don’t expect a Catholic values fund to outperform the S&P 500, why would you expect a woman-owned company to outperform the S&P?” he said.

Martin, like many others who have been in financial services for decades, has seen the evolution from socially responsible investing to ESG and now toward something else.

ESG "Under Attack"

BlackRock chief executive Larry Fink, who until recently was one of the biggest proponents of ESG investing, has stopped using the three letters to identify the category.

Last month London Business School professor Alex Edmans published a paper proposing the term “rational sustainability,” because “ESG is under attack from all sides.”

This follows 2023 when ESG funds saw record outflows that are continuing into 2024.

Over the past 12 months, the $13.3 billion iShares ESG Aware MSCI USA ETF (ESGU) has experienced $9.2 billion worth of outflows. The $1 billion Xtrackers MSCI USA Leaders Equity ETF (USSG) has watched $2.5 billion go out the door over the same period.

And the $1.2 billion iShares ESG MSCI USA Leaders ETF (SUSL) has suffered $2.3 billion worth of outflows.

“People aren’t just tired of ESG, they’re running from it,” Martin said.

“With a phrase like rational sustainability at least one of those words has a basis in math,” he said. “It’s not based on math, but it sounds like it. I wish the investment management industry would get away from what sells and focus on what works.”