Another blow for ethical investors as ESG withdrawals continue

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ESG equity funds, which prioritize companies adhering to environmental, social, or governance criteria, experienced a significant outflow of funds in May with net flows of minus £304 million.

The appeal of ESG investing has been a powerful tool for the funds industry, attracting substantial inflows in recent years. In 2022, ESG-badged funds received a net influx of £6.7 billion, followed by £11.2 billion in 2021 and £6.7 billion in 2020. Typically, most months witnessed strong net purchases as end-investors sought to align their investments with sustainable and responsible practices.

However, the May data reveals a significant departure from the previous trend. Investors’ behavior shifted, with a higher number choosing to sell their holdings in ESG equity funds instead of making new investments. This unexpected change raises questions about the factors influencing investor sentiment and the potential impact on the ESG funds industry.

The fluctuating dynamics within ESG investing highlight the complex interplay between investor preferences, market conditions, and perceptions of the efficacy of ESG metrics. As the story unfolds, it remains to be seen how this evolving landscape will shape the future of ESG funds and the broader sustainable investing movement.

It’s not the first time ESG investing has fallen out of favour with UK investors

Last month, US broker Charles Schwab has published the results of an online survey, it conducted among 1000 UK investors. The survey found that the appeal of companies with strong ESG credentials among UK Investors had fallen by -7.0% since February 2021.

Amid the ongoing cost of living crisis, almost 70% of investors prioritised maximising their returns over sustainable investing. Schwab’s survey also found that the number of UK investors that consider ESG, when making new investments is dwindling, having fallen by -6% to just 38% since December 2021.

So are ESG-only platforms worth it? Or are you better off including ESG as part of your overall portfolio?

Once again, demographics matter

Demographically speaking, Boomers and GenX are the least likely to take environmental, sustainability and social governance issues into account when managing their money.

With only 23% and 32% of their respective age cohorts taking these factors into account.

The better news for ESG is that younger generations are more engaged, with, roughly half of Millennial and GenZ investors factoring in ESG when they invest.

ESG returns disappoint

Part of the problem could be lacklustre returns, for example, over the last two years the S&P 500 ESG index has returned -0.14%, whilst the vanilla S&P 500 index easily outperformed, gaining by just over 4.0%.

However, the S&P 500 Information Technology sector returned almost 18%, over those 24 months.

ESG Exchange Traded Funds, such as the highly rated iShares MSCI USA ESG Select ETF (SUSA) often have significant exposure to technology, which meets many ESG criteria.

SUSA has a 20.0% weighting to the sector, for example. Yet for all that, it still posted a -2.0% two-year return.

The above suggests that ESG investors would have been better off holding the S&P Info-tech sector rather than a dedicated ESG fund.

ESG platforms have been shuttering

We have also recently seen a number of dedicated ESG investing platforms reduce their services, or shutter completely.

For example, Clim8 wrote to clients earlier this year with the news that it would close for good on May 30th.

Whilst the ethical investing platform Tulipshare recently announced that it was unable to raise fresh working capital, forcing it to pivot into a shareholders’ rights and voting app.

There is still some ESG appetite among brokers and investing platforms, with CMC Invest launching a suite of ESG-focused tools and analysis.

Products that can help investors identify the ESG credentials and ratings of individual equities or funds before they invest.

Of course, there are still dedicated ESG funds and Robo-advisors, such as Moneyfarm and thematic investments on DIY investing platforms such as Interactive Investor, that are available to UK clients. Whilst Interactive Brokers have gone as far as to launch a carbon offset service for their clients.

In the financial markets, it doesn’t pay to be too dogmatic. ESG is important but overall returns matter more, yet the two are not incompatible.

To get the best returns whilst keeping ESG in mind, investors simply need to be flexible and make good use of the many tools and resources that are available to them.

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