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In the first quarter of this year, investors withdrew an unprecedented amount from “sustainable” funds, signaling that the backlash against ESG (environmental, social, and governance) investing in the US is starting to have a global impact.
American investors have decreased their investments in sustainable mutual and exchange-traded funds for the tenth consecutive quarter, while European investors became net sellers for the first time since 2018, pulling out $1.2 billion, according to Morningstar’s data.
Asian investors have also reduced their holdings, resulting in a total of $8.6 billion in net outflows—the largest withdrawal figure recorded.
This trend suggests that opposition to ESG funds may be gaining traction in Europe, the birthplace of this investment approach, which holds 84% of the global $3.2 trillion in ESG funds.
The political right has criticized ESG, arguing it emphasizes divisive social and political issues over financial gains, labeling it as “woke capitalism.”
While this resistance has been primarily seen in the US, Europe is also witnessing pushback, particularly against the aversion to defense stocks within ESG funds. This comes as the continent is focusing on military strengthening following Russia’s invasion of Ukraine in 2022 and concerns regarding the previous US administration’s support for Ukraine.
“This quarter marks a turning point. The backlash against ESG is intensifying in the US and is now clearly affecting perceptions in Europe,” remarked Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
The withdrawals occurred alongside significant investment in traditional funds, especially in Europe, indicating that the trend isn’t a general withdrawal from the market.
Bioy noted that the US-led opposition to ESG and diversity, equity, and inclusion initiatives is impacting asset managers worldwide.
“The backlash from the US is making managers more cautious globally,” she stated, adding that it’s changing how they market and present their products outside the US.
As the EU prepares to strengthen regulations against misleading claims about investments, Morningstar found that 335 sustainable products in Europe rebranded in the first quarter, with 116 removing ESG-related terms from their names.
Additionally, 94 European funds were either liquidated or merged, while the US saw a record 20 fund closures in one quarter.
Bioy expressed concern that the political move to view defense companies as acceptable investments for ESG funds could confuse long-time supporters of sustainable investing.
“Regulators are now saying it’s acceptable to invest in weapons,” she mentioned. “This is something that [ESG] investors would have found unacceptable a few years ago, which may lead to some confusion.”
