ESG Funds Remain Resilient Despite Political Headwinds
Major ESG ETFs maintain positive performance and flows even as corporate America retreats from sustainable investing initiatives.
As political pressure mounts against environmental, social and governance (ESG) investing, retail investors aren't abandoning sustainable exchange-traded funds—even as major corporations scale back their ESG initiatives.
Over the past two years, investors pulled $17.9 billion from ESG funds amid rising political opposition. Still, certain ESG-focused ETFs attract new money and deliver competitive returns, highlighting a growing divide between institutional and individual investor attitudes toward sustainable investing, according to the latest Cerulli Edge—The Americas Asset and Wealth Management Edition.
This sustained retail interest is evident in flow data for major ESG ETFs. The iShares ESG Aware MSCI USA ETF (ESGU), one of the category's largest funds with nearly $14.2 billion in assets, has pulled in $588.7 million in new money year to date, according to etf.com data. The bulk came in a Jan. 17 trade.
Source: etf.com
"A sizable population of investors still exists who place value in ESG screens, particularly those centered on environmental and living wage issues, even if they otherwise might not be interested in becoming ESG investors," says Scott Smith, director at Cerulli Associates.
The institutional retreat comes as corporations withdraw from a raft of ESG initiatives. Major banks including Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) recently withdrew from the United Nation's Net-Zero Banking Alliance, while companies like Walmart Inc. (WMT) have scaled back diversity programs amid criticism from conservative politicians.
Yet according to Cerulli's research, 67% of individual investors still prefer to invest in companies paying fair wages, while 49% favor environmental leaders. Among investors under age 40, who are increasingly wealthy and more likely to seek financial advice, 66% prefer ESG-aware investing.
Performance Stays Competitive
The ongoing retail support coincides with competitive performance from major ESG funds. ESGU has gained 22.3% over the past year, while the Vanguard ESG U.S. Stock ETF (ESGV) returned 23.5%, according to etf.com data. ESGV has attracted $167.8 million in fresh assets this year, growing to over $10.5 billion since its 2018 launch.
Even newer, more targeted ESG products are finding selective interest. The $15.9 million BNY Mellon Women's Opportunities ETF (BKWO), which launched in May 2023 focusing on gender diversity, has pulled in $11.8 million in cash and gained 17.4% since inception, etf.com data show.
While ESG strategies face continued headwinds from conservative state legislatures restricting sustainable investing, Cerulli's research suggests the retail market remains fertile ground. The firm found that among ESG skeptics, 35% say they would consider sustainable investing at the encouragement of a financial advisor.
"The difference now is that there must be more scrutiny of the funds in question to ensure they operate as advertised as part of the standard risk-reward assessments advisors routinely make for their clients," the report notes.
