Largest ESG Fund Bleeds Cash Amid Political Backlash

The largest environmental, social and governance index fund is losing billions in investor cash, apparently a result of the ongoing political backlash over so-called socially responsible investing.  

The iShares ESG Aware MSCI USA ETF (ESGU) bled nearly $4 billion last Friday and an additional $921 million on Monday, according to Bloomberg data. Friday’s outflow was a record loss for ESGU since its 2016 inception, the data shows. Nearly $6 billion has exited the fund so far this year.  

Investors appear to be reacting to growing negative sentiment around ESG investing, according to Aniket Ullal, head of ETF data and analytics at CFRA Research.  

He said the outflows don’t appear related specifically to a particular stock or sector exposure, since ESGU is largely invested in information technology, among the year’s better performers.  

“If the outflows are not driven by exposure or performance, it is likely driven by the broader current negative sentiment around ESG,” Ullal said in emailed comments. “While it is underperforming the S&P 500, its performance is not significant enough to justify this magnitude of outflows.”  

“Since ESGU is the largest indexed ESG ETF by assets, flow movements tend to be magnified in this specific fund,” he added. 

Source: Bloomberg  

ESG investments have been hammered, in part, by political divisiveness on the issue. ESG-labeled funds shed $2.1 billion in the fourth quarter of 2022, compared with $6.1 billion of inflows in the year-ago period, according to data from research firm Strategas Securities. Year to date, ESG ETFs have lost more than $5.5 billion, according to Bloomberg data.  

Republican-led states have pulled in more than $1 billion from BlackRock, parent of the world’s largest ETF issuer and ESGU’s issuer, citing ESG concerns. Democratic-affiliated government officials, conversely, have slammed the firm for not being sufficiently friendly to environmental, social and governance issues.  

Earlier this month, lawmakers voted in favor of reversing regulation allowing retirement plan managers to consider ESG factors in making investment decisions. In response, President Biden rejected the proposal in his first veto in office on Monday.   

That trend may accelerate as candidates such as Vivek Ramaswamy, the most prominent ETF industry participant to ever run for president, and Florida Governor Ron DeSantis—who proclaimed his state as the one in which “woke goes to die”—continue to rage against ESG ideology and investing.  

Even BlackRock CEO Larry Fink is beginning to temper his usual bullish tone on ESG investing, reframing the issue as investment opportunities as opposed to socially conscious investments.  

According to Todd Sohn, ETF strategist at Strategas Securities, ESGU’s outflows could be indicative of wider fallout for the investment theme.  

“Depending on the client, it appears the ESG story is really running out of gas here—unless you are a very specific manager who knows the space,” Sohn said in emailed comments to etf.com. “Watered-down ESG isn’t working or a compelling story anymore to me.” 

Contact Shubham Saharan at [email protected]