Leading fund managers such as BlackRock and State Street are closing sustainability themed funds in the US due to a political backlash and increased investor scrutiny, according to data from Morningstar.
The research firm said Columbia Threadneedle Investments, Janus Henderson Group and Hartford Funds Management Group were also on the list and have unwound over two dozen environment, social and governance (ESG) funds.
Morningstar said that the US had 656 sustainable funds as of June 30, but the number of liquidations is increasing from prior years.
In the second quarter of 2023, global sustainable funds attracted $18 billion of net new money, a significant reduction on the $31 billion attracted in the quarter prior.
The decrease was mirrored by a reduced quarterly organic growth rate. Calculated as net flows relative to total assets at the start of a period, Morningstar said that global sustainable funds saw their organic growth rate decline to 0.7%, from the restated 1.2% in the previous quarter.”
Although weak macroeconomic conditions have had an impact, US sustainable funds are also impacted the ongoing political backlash to the sustainability agenda.
BlackRock chief executive officer Larry Fink stopped using the term ESG earlier this year, saying it has become too politicised. Instead he discussed investments tied to the transition to a lower-carbon economy.
Anti-ESG sentiment has also been fuelling a slew of anti-ESG legislation. For example, Florida’s Senate approved a bill banning state and local governments from using ESG  criteria when selling debt or investing public money in April 2023.
It also prohibits Florida municipalities from selling bonds related to ESG projects and bans seeking ESG ratings.
In March, Governor Ron DeSantis formed an alliance with 18 other US states- Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, Virginia and Wyoming – to pushback against the Department of Labour’s new rule allowing climate-aligned funds in 401(k) retirement plans, passed in 2022.
Meanwhile, at the beginning of this year, Kentucky placed Blackrock, JPMorgan and Citigroup on a divestment list citing reasons of fossil fuel boycott by these entities.
Last July, West Virginia said it would no longer give state business to banks such as Goldman Sachs and JP Morgan Chase citing harm to the state’s economy due to lack of financing for coal companies.
Two years ago, Texas was one of the states that started the ball rolling and banned its municipalities from working with banks that limit business with firearms as well as energy industries.
Although US asset managers are feeling the heat, companies are also under pressure to curtail ESG bond issuance.
According to Bloomberg, ESG debt accounted for only 2.5% of $248 billion of bonds issued by US companies in the first quarter of 2023, compared to 6.08% of $209 billion issued in the same period last year.
In a recent survey of 100 US companies by think tank Conference Board, nearly half said they have already experienced ESG backlash, and 61% expect it to persist or intensify in the next two years.
Companies also expect it to spread. While the financial services industry, and large asset managers in particular, have borne the brunt of this pushback,a majority of companies expressed concern they will face opposition from federal and state officials and candidates.
Moreover, a growing number of firms also expect criticism from employees, consumers, business partners, the media, and investors.
It is not surpirsing then that ESG has and will become such a political football at the 2024 elections where the full 435-seat House of Representatives and one-third of the 100-seat Senate will be up for election.
Currently, Republicans have a slim majority in the House , while the Democrats have a slim majority in the Senate.
A clear Democratic or Republican majority in both the houses after the elections will give greater clarity on the fate of ESG in the US. However, if the narrow majority margins in the two houses persist after the 2024 elections, ESG will continue to be a political bone of contention.
©Markets Media Europe 2023
