Ethical investing: Is this the beginning of the end?

After years of relentless marketing of so-called ethical investing solutions by the world’s leading asset managers, investors now appear to be turning their backs on the ESG movement.

Data provided by Morgan Stanley shows the floodgates on outflows from sustainability-focussed fixed income funds have opened in 2022.

Assets under management of fixed income sustainability funds in the United States currently sits at around $475 billion.

This is down from $545 billion at the start of the year.

It’s a 14% drop, or around $70 billion of assets allocated away from bonds and other fixed income products labelled ‘sustainable’.

There’s also been sharp outflows from sustainable or ethical equities funds – not just in the U.S. but right across the world.

According to ESMA, ESG-focussed funds in Europe are experiencing broad-based outflows for the first time in two years, with around €5 billion of outflows reported in the second half of 2022.

While the latest Morningstar data shows in the second quarter of 2022, U.S. sustainable equity funds recorded net outflows of $1.6 billion – the first time the sector has recorded quarterly net outflows in five years.

A far cry from the environment last year, when U.S. sustainable funds attracted $21.5 billion in net inflows in the first three months of the year.

Anti-ESG groundswell

An anti-ESG branded ETF, with the ticker DRLL, launched by Strive Asset Management in August remains the most successful non-seeded ETF launch in the U.S. so far this year.

The DRLL ETF, saw $300 million in inflows in its first three weeks of trading, and while inflows in September slowed to just over $31 million, Strive is confident the Fund will hit the $500 million mark in the coming months.

“Strive’s message to U.S. energy companies is simple: do what is best for shareholder value,” said Strive’s head of corporate governance in August.

“The energy sector has been very receptive to our message. Their openness to our message shows they want to focus solely on delivering excellent products and leave politics to the politicians.”

Such anti-ESG funds are no doubt benefiting for the extremely strong performance of energy stocks in 2022.

To put the performance into perspective, from the beginning of the year to the end of September the MSCI World Energy Index has gained +29%.

This compares to the MSCI World Index, which has fallen -25%.

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Ethical investing
Image: MSCI