US Investors Have Been Dumping ESG Funds

US Investors Have Been Dumping ESG Funds
Theodora Lee Joseph, CFA

10 months ago2 mins

Not long ago, environmental, social, and governance (ESG) investing was blossoming, but things haven’t looked so rosy since the start of this year. According to data compiled by Bloomberg, ESG ETFs in the US saw net outflows of $772 million in January, a sharp contrast against the $953 million of inflows they saw at the same time last year. And now as we enter a period of high interest rates and lower growth (potentially even a recession) – the question is: can ESG investing provide sustainable returns?

In 2022, the 10 biggest ESG funds in the US all posted double-digit declines, with eight of them doing worse than the S&P 500. Part of that underperformance was because most of these funds were heavily weighted in growth stocks and the tech sector, which were hammered when interest rates moved higher. Limited exposure to energy – the best-performing sector last year – also held them back. And a recession would threaten to widen the underperformance gap. Authors from a recently published academic study revealed that sustainable investing was more likely seen as a fair-weather option – with investor demand for socially responsible investing varying a lot based on income shocks and economic stress.

That shouldn’t really come as a surprise. When the going gets tough, we cut back on “feel-good” investments. And as our disposable income shrinks, we’re more likely to be risk-averse and prioritize safer investments with a greater certainty of generating cash and returns in the shorter term. In other words: while sustainable investing is important to many of us, so-called green companies need to be evaluated on their earnings viability just like any other company or investment. So before you think about investing in “sustainable” companies, make sure their earnings can also withstand a recession, in an environment where capital is a lot more expensive.



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