Backlash against ESG seen in sharp decline of fund launches

By Alastair Marsh July 18, 2024, 12:58 p.m. EDT 3 Min Read

At some of the world's biggest asset managers, ESG fund launches are quietly stalling.

BlackRock, Deutsche Bank AG's DWS Group, Invesco and the asset management arm of UBS Group AG are among firms that have cut the number of new funds with environmental, social and governance mandates, according to data provided by Morningstar Direct.

This year through the end of May, just over 100 ESG funds were launched globally, putting the industry on track to fall well short of levels seen in recent years, the data show. By comparison, there were 566 ESG fund launches during all of 2023, which was down from the 993 seen in 2022. What's more, the 16 ESG funds opened in May represent the lowest monthly tally since the beginning of 2020.

Against a backdrop of political attacks in the U.S. combined with a crackdown on greenwashing in Europe, it's the latest sign that the finance industry is cooling to the ESG label. Since its pandemic-era heyday, a cocktail of higher inflation, higher interest rates and a slump in clean-energy stocks has driven down ESG fund performance. Those doing well are generally packed with tech stocks, many with questionable ESG attributes.

ESG also continues to find itself under attack in the U.S., where the Republican Party has imposed bans and threatened lawsuits against perceived perpetrators. And in Europe, stricter ESG fund-naming rules look set to get the label removed from some passively managed portfolios.

"Launches of ESG funds have plummeted due to adverse performance, poor product design and politics," said Huw van Steenis, partner and vice chair at Oliver Wyman. "Once again, investors have learned the hard way that investing by acronym is never an enduring way to allocate capital."

The contrast with conventional funds is stark. The broader market is on pace for a similar level of fund creations this year, with launches at the end of May totaling 2,576, or about 40% of the total for all of 2023.

And when it comes to the amount of assets held by new funds, conventional funds drew in $158 billion at the end of May, not far off the $183 billion recorded in all of 2023, according to Morningstar. Newly launched sustainable funds attracted $6.8 billion, compared with a full-year total of $37.2 billion in 2023.

Just a few years ago, sustainable investing was a feel-good business for Wall Street, a way for asset managers to tout their ability to make money and also pay attention to companies' carbon footprint and social impact. With the Republican backlash, it quickly became a liability to those who had actively promoted their ESG credentials.

There may be some renewed reasons for ESG optimism. At least five U.S.-based ETFs with ESG in their titles posted returns of more than 20% this year, topping the 18.8% advance of the S&P 500.

Asset managers that have been scaling back on offering new sustainable funds say the development is a reflection of a maturing market.

There's now less "white space" in the product offering after several years of building up the sustainability range, said Christoph Zschaetzsch, who heads product development for DWS's active funds business. He characterizes the development as "a normalization."

Last year and 2022 "were the ESG ramp-up years," said Michael Mohr, head of product development at DWS's Xtrackers franchise, which consists largely of exchange-traded funds. Back then, it was "full steam ahead" for ESG and "all providers looked into completing their sustainable ranges with new launches to fill growing demand," he said.

Now, it's more about "tweaks and adjustments of products that are already out there in the market," Mohr said. However, demand is now "a lot more specific, with customers seeking specific climate solutions or funds that focus on a theme, such as net zero or biodiversity," rather than just ESG as a generic theme, he said.

At Invesco, the "heavy building" of its ESG fund business is now completed, a spokeswoman for the asset manager said. Any future launches will be done more selectively to fill any gaps that are identified, she said.

Alastair Marsh

Bloomberg News