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ESG funds’ shunning of traditional energy stocks has suffered losses following the surge in oil company stocks last year.
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Investors capped a challenging year for environmental, social and governance strategies with the largest net withdrawal of approximately $6.2 billion from U.S. sustainable funds in over five years last quarter.
Net money flows into U.S. sustainable and exchange-traded funds have been steadily declining since hitting a record high in the first quarter of 2021, according to a new report from .
Lucifer
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The decline comes as fears of inflation, rising interest rates and a prolonged recession weigh heavily on markets and investor sentiment.
But that doesn’t explain the shift as a whole. Alissa Stankewicz, Associate Director of Sustainability Research at Morningstar and co-author of the report, said the growing politicization of ESG investing is also having a negative impact on investment strategies that prioritize social and environmental issues. says there is.
Despite the difficult circumstances, there was also some positive news. In 2022, sustainable funds raised more than $3 billion of his capital, while traditional U.S. funds saw him withdraw more than $370 billion in one year. This was the first calendar-year net outflow since Morningstar began tracking the data in 1983.
Annual US sustainable fund assets under management reached $286 billion.
In terms of performance, sustainable funds have lagged the broader market.
S&P 500
Index with an increase of 66%. Communication services, consumer goods and information technology declined by 40%, 37% and 28% respectively.
As a result, funds with an underweight in the energy sector have been hit, as have many sustainable funds. “Investors may prefer traditional energy exposure over low energy sustainable funds given their relative return expectations,” Stankiewicz said in a blog post.
While sustainable and traditional funds suffered outflows in the fourth quarter, sustainable fund outflows were measured by the so-called organic growth rate (ratio of net funds to total assets at the start of the period). More serious, Stankiewicz said.
In the first quarter of more than three years, US sustainable funds have had lower organic growth rates than the US fund universe as a whole. Organic growth “gives you a big picture of how big the money flows,” Stankiewicz said. During the fourth quarter, sustainable funds shrank by 2.2% compared to his 0.8% contraction across the United States.
The three US ESG funds with the highest net inflows in Q4 were American Century Sustainable Equity (Ticker: AFDAX), Calvert Equity (CSIEX), and
iShares ESG US Aggregate Bond ETF
(EAGG).The two funds that saw rapid outflows were
iShares ESG Aware MSCI USA ETF
(ESGU) suffered a net outflow of $1.8 billion, while Parnassus Core Equity (PRBLX) had $1.2 billion.
Global Sustainable Funds attracted $37 billion of net new money in the fourth quarter, with assets under management rising slightly from three months ago to $2.5 trillion.
Morningstar says its global sustainable fund universe includes mutual funds and ETFs. impact; or environmental, social, and governance factors. ”
One of the criticisms of ESG over the past year is the lack of consensus on what the term ESG investing means.
“ESG is ill-defined,” said Hortense Bioy, Morningstar’s global director of sustainability research and lead author of the quarterly report. Barons“The industry needs to clarify what ESG means.”
Write to Lauren Foster at lauren.foster@barrons.com.
