Investors in the US pulled a total of US$13 billion out of sustainable funds in 2023, making this the worst year on record for ESG investments in the country.
2023 was a tough year for sustainable funds, as lower rates of return and increased scrutiny around ESG fund labels prompted many investors to rethink their involvement. For US-based funds, it was the worst year since financial analytics firm Morningstar began tracking flows more than 10 years ago.
In the fourth quarter alone, US investors pulled US$5 billion from sustainable funds. It was also the second consecutive quarter with more sustainable fund closures than launches: eights new funds were launched, while 16 were liquidated.
The research company notes that sustainable funds performed better in 2023 than in 2022 with median gains of 20.8%, but still underperformed conventional funds: the Morningstar US Large-Mid Cap Index saw median returns of 26.9%. High interest rates and supply chain disruptions contributed to these lower returns, and will continue in 2024, the company added.
Anti-ESG backlash in the US
But beyond this slight underperformance, sustainable funds also suffered from greenwashing concerns and a political anti-ESG campaign led by conservative politicians in the US – which led BlackRock CEO Larry Fink, known as a vocal supporter of corporate climate action, to stop using the term ESG.
Between January and June 2023, at least 165 bills against ESG investment criteria were introduced in 37 states. 83 of them failed to make it into law, but 22 bills and six resolutions were approved by state governments. The wave of anti-ESG legislation continues in 2024: for example, republican lawmakers in New Hampshire are seeking to make the use of ESG criteria in state funds a crime.
And the backlash is not limited to ESG investment – resistance to the Securities and Exchange Commission’s proposed climate rule is another expression of this sentiment, with critics arguing that sustainability rules hinder the free market and go against investors and corporations’ best interests.