(Bloomberg) -- Cash flows into US sustainable funds plummeted last year as the broader market took a beating and anti-ESG crusaders targeted money managers including BlackRock Inc. for “woke capitalism.”
ESG exchange-traded funds in the US aren’t faring any better in 2023.
ETFs in the US with environmental, social and governance goals had net outflows of $772 million in January, compared with $953 million of inflows for the first month in 2022, according to data compiled by Bloomberg. Some of the largest withdrawals last month came from funds managed by BlackRock, Invesco Ltd. and Vanguard Group.
BlackRock had zero net flows into its sustainable products in the US last year, according to a person with knowledge of the matter. The company declined to comment.
“Last year there was an enormous, well-coordinated backlash against this topic which just changed the sentiment,” Aniket Shah, global head of ESG strategy at Jefferies Financial Group Inc., said in an interview. “The sentiment came all the way down to financial advisers and individuals deciding where to put their investments.”
The ESG industry in the US faced a reckoning last year, when sustainable mutual funds and ETFs took in a net $3 billion of client money compared with $70 billion in 2021 — a 96% plunge, according to data from Morningstar Inc.
The political blowback in the US came on top of the worst year for investing in stocks and bonds since the 2008 financial crisis. ESG funds, especially those linked to indexes, were often heavily invested in technology and growth stocks and many had limited exposure to the energy sector, the best-performing part of the S&P 500 index in 2022.
The anti-ESG sentiment wasn’t global, and ESG investments performed better outside the US last year.
BlackRock, the world’s biggest money manager and prominent backer of sustainable investing, had $65 billion of flows in sustainable funds globally in 2022, according to the person with knowledge of the matter. The company had positive flows in its sustainable long-term products every quarter last year. Its sustainable platform makes up roughly $500 billion of the firm’s assets under management, the company said in a recent memo.
In 2022, Republican state officials across the US, including treasurers, attorneys general and Florida Governor Ron DeSantis, campaigned against ESG investing, contending the strategy promotes social or ideological interests at the expense of investment performance.
Anti-ESG officials took aim at BlackRock and Chief Executive Officer Larry Fink, who warned other CEOs in 2020 that “climate risk is investment risk.” At least six states said they plan to pull more than $3 billion from BlackRock, while House Republicans are pushing back on Biden administration efforts to bolster ESG investing.
Read more: BlackRock Struggles to Escape From the ESG Crossfire: Timeline
The anti-ESG push is likely only one factor that kept money out of sustainable funds. ESG funds took in large inflows in 2020 and 2021 as investors wagered on the Biden administration’s green agenda and followed the European Union’s lead of financing environmentally friendly businesses.
“Is it true that we were probably overbought coming into 2022? Absolutely,” Peter Krull, partner and director of sustainable investing at Earth Equity Advisors, a Prime Capital Investment Advisors company, said in an interview. “Valuations on the growth side were certainly above what they should have been.”
Sustainable ETFs were also used in model portfolios, broad asset-allocation strategies that investment advisers recommend to clients. Changes to those models can produce significant flows in and out of funds.
BlackRock’s iShares ESG Aware MSCI USA ETF — one of the country’s biggest ESG ETFs — had $1.2 billion pulled in October, spurring market speculation about a shift in the asset-management giant’s model portfolios. The fund had a net withdrawal of $666 million on Jan. 11, according data compiled by Bloomberg.
Skittishness about investing in stocks more broadly also factored largely into the ESG pullback in the second half of last year, said Joe Sinha, chief marketing officer of Parnassus Investments, which integrates ESG analysis in its funds.
“I haven’t seen new ESG mandates, models, recommended lists in a little while,” Sinha said. “I would definitely say that part of the business has been softer.”
Even if tech and growth stocks do bounce back this year, Sinha said it could still take time for investors to add new money to sustainable funds.
“It’s clear that people wait for multiple observations — that the market seems safe — and they jump in,” he said. “You get a moderation in the beginning and then ironically people sort of wait for stocks to go up.”
--With assistance from Margot Wentzel.
©2023 Bloomberg L.P.