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Launches of funds claiming environmental, social or governance attributes all but dried up in the past six months, as investors baulked at increased scrutiny of sustainability claims by companies and asset managers.
Just six funds citing environmental, social and governance factors launched in the second half of 2023, compared with 55 in the first half, and an annual average of almost 100 between 2020 and 2022, according to data from Morningstar Direct.
ESG labels have also been removed from some fund names. The asset manager Abrdn plans to drop the phrase “sustainable leaders” from two funds in February, according to a filing with the US Securities and Exchange Commission. Morgan Stanley and UBS also dropped ESG-oriented labels from some funds last year.
The moves come as ESG strategies encounter more attention from regulators, politicians and clients.
ESG broad-market funds generally outperformed their conventional counterparts in 2019, 2020 and 2021 but slipped in 2022 and 2023, according to Morningstar.
“It’s likely performance prospects,” said Alyssa Stankiewicz, Morningstar associate director of sustainability research. “We know, unfortunately, that investor behaviour — reallocating for performance — tends to follow performance rather than precede it.”
However, performance has not been the only factor deterring investment in ESG funds. In the US, Republicans have criticised financial firms for their hostility to fossil fuels and for being “too woke” by embracing social commitments such as diversity, equity and inclusion.
Beyond sustainable fund launches, more than 120 other funds were either renamed or given updated strategies to reflect the use of ESG factors between January 2018 and late last year, according to data compiled by Morningstar.
Stankiewicz acknowledged that ESG funds had struggled to perform in recent months but noted that most of the ESG outflows in 2023 were withdrawn from a single ETF. BlackRock’s iShares ESG Aware MSCI USA ETF, commonly known as ESGU, lost more than $9bn in assets as it was removed from a BlackRock model portfolio.
The two Abrdn funds will continue considering “the most material” ESG factors in their security selection after dropping the sustainable leaders label but they will emphasise factors such as business model durability and financial strength, according to a filing from the asset manager. Abrdn’s two other sustainable leaders funds will keep the label.
“The removal of ‘sustainable leaders’ from the names of the impacted funds is related to a change in the strategies of the funds, not a rebrand,” Abrdn said. “Abrdn continues to offer other sustainable strategy funds where ‘sustainable’ is reflected in the name.”
The SEC updated rules for funds in September to have at least 80 per cent of their assets invested in accordance with their names, including those advertising ESG factors. Asset managers will have at least two years to comply.
“In anticipation of evolving regulation we renamed two US sustainable money market funds,” UBS said.
Morgan Stanley did not respond to a request for comment.