The past two years have seen a trend among Republican-controlled states passing legislation prohibiting state pension funds from considering ESG factors. Additionally, some states like Texas created “banned lists” of financial institutions that state funds are not allowed to do business with due to the institutions’ perceived use of ESG criteria in investing. It appears that sustainable funds are feeling the effects. International Financing Review recently published an article discussing record outflows from US sustainability funds stating that:
“Sustainable funds in the US shed more than US $13bn in 2023, marking the first year of net outflows in more than a decade as the ongoing political backlash and high interest rates continue to subdue appetite for ESG-focused investments. US sustainable funds shrank by 4.6% last year, whereas their conventional peers grew by 0.3%, according to Morningstar data.”
The article states that BlackRock, who found themselves on the Texas “banned list,” saw the largest outflow of $9.3bn. However, the article also mentions that while $13bn has been divested from sustainable funds, the value of assets under management has grown to over $300bn. This seems to indicate that political pressures are driving some divestment, but overall sustainability funds are exhibiting solid performance. The author also notes that sustainability fund performance lagged behind benchmarks in 2023, but that sustainability funds generally performed well over the last five years. What isn’t clear is what impact, if any, the great “ESG fund renaming” had on these numbers (recall that many funds chose to eliminate the term “ESG” from their names and/or investment strategies as a result of increased regulatory scrutiny). Going forward, it will be interesting to see if anti-ESG investing laws have a long term effect on sustainability funds, or if divestments are merely a bump in the road.
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