Mobile Billboards will pass through the US Capitol on May 10, 2023.
Jemal Countess | Getty Images Entertainment | Getty Images
Investors have withdrawn money from so-called ESG funds in recent years amid political backlash, high interest rates and other headwinds.
However, analysts say the outlook for fund category, short for “environment, social and governance,” and long-term investment papers are advantageous.
President Donald Trump’s agenda is “not a ‘game over’ of ESG investment,” Capital Economics’ senior market economist Diana Iovanel wrote in a research note on Tuesday.
Iovanel said demand for ESG investment “stays” in the face of political pressures that it “stays here.”
ESG leaks in “anti-ESG backlash”
ESG investments are known by many names, such as social responsibility, sustainability, impact, or value-based investments. These funds allow people to invest according to specific values, such as climate change and corporate diversity.
According to Morningstar, investors yank nearly $2 billion from funds traded on US ESG mutual and exchanges in 2024, after withdrawing about $13 billion in 2023.
In contrast, investors poured $740 billion into the entire mutual fund and ETF universe in 2024, Morningstar discovered.
“We’re looking forward to seeing you get a lot of money,” said Holtens Bioi, Morningstar’s Head of Sustainable Investment Research.
Critics call it a form of “awakening capitalism” in which sacrifices for liberal goals.
Supporters argue that ESG investments are positioning investors for higher long-term returns. Because companies that employ such practices are more resilient and therefore more successful than their peers.
The outflow continues to grow steadily over many years
The second consecutive year of outflows in 2023 and 2024 followed years of stable ESG growth.
According to Morningstar, investors have poured a total of $130 billion into US ESG funds over the past decade. For example, investors put more than $500 billion into ESG funds in 2020, with nearly $70 billion in 2021, and nearly $70 billion according to Morningstar.
More details from personal finance:
Customs whiplash surges in fear-based shopping
If investors avoid these three things, they’ll be “mile ahead”
Social Security Administration delays identity policy
Despite the outflow, the overall ESG fund assets grew slightly in 2024, rising to $344 billion due to market valuation.
The demand for investors also appears to be relatively high, especially among younger investors, according to analysts.
According to a 2024 Morgan Stanley survey, approximately 84% of individual US investors are interested in sustainable investments. Approximately two-thirds, 65% and 65% of respondents said interest has increased over the past two years.
Politics brings ESG headwinds
However, the political backlash against the ESG fund’s underlying initiatives has been strengthened “very quickly” since President Trump was elected, Bioy said.
Within the first days of the inauguration, Trump had separated the US from the Paris Agreement, blocked subsidies for electric vehicles, promoted fossil fuel production, and launched a “big pushback” to diversity, equity and inclusion policies, writes Iobanel of Capital Economics.
The Republican-led Securities and Exchange Commission on Thursday said it would stop defending climate change disclosure rules in court. The regulations required baseline transparency regarding climate risks and greenhouse gas emissions from certain public US companies.
There is also uncertainty about the fate of the Inflation Reduction Act, a historic climate change mitigation law signed by President Joe Biden.
Even before President Trump’s second term, at least 18 Republican-led states adopted “anti-ESG laws” and encouraged several large asset managers to “save” ESG efforts, Iovanel wrote.
According to Morningstar, the number of ESG funds first signed in 2024 fell 9%, down from 646 in 2023. This means that asset managers have fewer options available to investors.
“It’s very difficult for any asset manager to sell ESG products right now,” Bioy says. “They don’t want to attract attention.”
Apolitical headwind
ESG funds are also suffering from apolitical headwinds, Analyst said.
In fact, high interest rates are likely to be more hampering than politics, analysts said. High borrowing costs have a negative impact on sectors like clean energy than others, as they are more capital-intensive, analysts said.
Performance has also been slower in recent years. For example, according to a Morningstar analysis of investment returns, less than half of sustainable funds ranked in the top half of each investment category – 42% -.
It is very difficult for any asset manager to sell ESG products at the moment. They don’t want to attract attention.
Hortense Bioy
Morningstar’s Head of Sustainable Investment Research
Analysts said the decline in performance in recent years was due to high interest rates.
Furthermore, oil and gas prices boomed after Russia invaded Ukraine in 2022. For example, the top 10 stocks in the S&P 500 that year were from, for example, the Energy sector. As a result, the ESG portfolio, which minimizes fossil fuel exposure, looked like a relative laguard, analysts said.
However, the performance was “very good” before 2022, Bioy said.
For example, according to an analysis by Morgan Stanley, a typical US ESG equity fund exceeded the returns of its peers by about 4 percentage points in 2020. The ESG bond fund was found to be better than about 1 point that year.
“Investments and ESG investments are no different. They’re going low and high,” says Bioy.
ESG is investing in saying it’s not a charity
But it’s not short-term, and ESG investments are not poised to be clearly outperformed, but long-term, analysts say.
In a study by McKinsey, C-Suite leader companies said that “tracking growth without considering how strategies affect people, planets and companies’ long-term sustainability” is “are unlikely to make a company grow completely.”
The goal of ESG investment is to reduce long-term risks in your portfolio, said Jennifer Coombs, head of content and development for the US Sustainable Investment Forum, known as US SIF.
Money managers who oversee the ESG portfolio also do not aim to sacrifice investment returns to pursue environmental or social agendas, Coombs said. Instead, she said they generally believe that investing in accordance with ESG principles will ultimately increase risk-adjusted returns for long-term investors.
“This is an investment,” Coombs said. “That’s not charity.”
“Sustainability takes a long time,” she said. “It’s long-term and that’s the whole idea.”
