Funds that market themselves as being opposed to environmental, social or governance (ESG) investment considerations have seen a decline in new investor deposits, according to a new report from Morningstar.
The research found that flows into so called anti-ESG funds peaked at $376 million during the third quarter of 2022, more than five times the previous quarterly record.
One of the best-known funds, the Strive US Energy ETF accounted for the bulk of the flows at over $300 million in the month after it launched last August.
However, the pace slowed in the last three months of 2022 with total net new deposits dropping to $188 million and $183 million in the first quarter of 2023.
Morningstar spokesperson Erin Parro said the current trend “still seems like a drizzle” compared with the downpour of new money during the third quarter of 2022.
Typically, anti-ESG funds take an opposite tack to sustainable and ESG investing.The report took a broad approach to defining the group of funds, but some of the fund companies included may not think they are opponents of ESG. Some anti-ESG advocates were likely excluded.
Morningstar grouped these funds into five mutually exclusive categories, primarily by referencing prospectus language.
The report also analysed performance, and found that 19 of the 26 funds identified as being anti-ESG had only two quarters of performance history to consider, although the products did show stronger net returns recently compared with Morningstar’s U.S. Market Index, at 17% and 15% on average.
However, the sample of funds is varied and the timetable of performance history is short, meaning that the results don’t necessarily reflect broader trends, the report noted.
About half of the funds have Morningstar medalist ratings, showing that the firm “has some degree of confidence in their ability to outperform peers or relevant benchmarks.”
Those 12 funds are all passively managed, and part of the reason for their expected outperformance is that they have low fees, it added. Another six funds were rated as neutral, and six more had negative ratings.
“The oldest anti-ESG fund — USA Mutuals Vice — also earns a Negative Morningstar Medalist Rating, dragged down by costly expenses, new management and a tendency toward low-quality, high-volatility stocks,” the report said.
It added, “These traits give the portfolio less ballast than peers during economic downturns, increasing the pressure on management during economic booms.”
Criticism of sustainable investing in the US has become very politicised over the past year. To understand the timeline and its magnitude, in a recent study we took a look at the funds (Morningstar counts 26) that have picked up the anti-ESG banner. Although there’s been a lot of talk about anti-ESG funds, it’s not clear that they have staying power.
Anti-ESG rhetoric has intensified in recent years, with sustainable investment becoming increasingly politicised, especially in the US.
It has reached such a point that Strive Asset Management formed with a dedicated ‘anti-woke’ agenda, which in turn served as a platform for founder Vivek Ramaswamy to launch a bid to become US president.
However, anti-ESG sentiment is not a new phenomenon. In her recent article, climate writer Emily Atkin traced the origins of the modern-day anti-ESG movement to 2004, when tobacco lobbyist Steve Milloy and Philip Morris alumnus Tom Borelli formed the Free Enterprise Education Institute, a non-profit focused on discrediting corporate social responsibility, or CSR, initiatives.
This group managed a website called “CSR Watch: Your Eye on The Anti-Business Movement” and started a fund – the Free Enterprise Action Fund – to invest in companies that management viewed as economically disadvantaged as a result of social activism.
In the fund’s prospectus, the firm provided examples of what it termed “harmful social activism”: “energy companies that have forgone investment in power plants based on social and environmental activism rather than on the projected profitability of building such facilities”; and “companies that have made certain benefits available and other concessions to their employees based on activism rather than on sound management principles.”
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