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Investors pulled a record amount from “sustainable” funds in the first quarter of the year, in an early sign that the US backlash against environmental, social and governance-based investing is going global.
While US investors cut their exposure to sustainable mutual and exchange traded funds for a 10th straight quarter, Europeans were net sellers for the first time on record in data going back to 2018, pulling out $1.2bn, according to data from Morningstar.
With Asian investors also cutting exposure, the $8.6bn of net outflows is by far the highest withdrawal figure ever seen.
The outflows indicate that the pushback against funds that invest on the basis of ESG factors may be spreading to Europe, the region where the concept first took hold and which accounts for 84 per cent of the $3.2tn held in ESG funds globally.
ESG has been criticised by many on the political right, who argue it prioritises contentious social and political agendas over financial returns, ushering in a form of “woke capitalism”.
While these concerns have been strongest in the US, there has also been a pushback against ESG funds’ traditional disdain for defence stocks in Europe, amid a drive for the continent to re-arm following Russia’s 2022 invasion of Ukraine and doubts over the Trump administration’s support for Kyiv.
“The quarter signals a shift. We’re seeing an intensifying ESG backlash in the US, which is now also noticeably affecting sentiment in Europe,” said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
The withdrawals have come despite strong buying of conventional funds, particularly in Europe, during the quarter, meaning they were not driven by a broader investor retreat from the market.
Bioy said she believed the pushback against ESG and diversity, equity and inclusion policies driven by the Trump administration was affecting asset managers around the world.
“The ESG backlash coming out of the US is affecting managers and making them more cautious globally,” she said. “It’s influencing the way they are talking about products and selling them outside of the US.”
With the EU set to tighten anti-greenwashing rules relating to investment funds’ names, Morningstar found that 335 sustainable products changed their names in Europe during the first quarter, including 116 that dropped ESG-related terms.
A further 94 European funds were liquidated or merged, while US fund closures hit a record quarterly level of 20.
Bioy said the political push to redefine defence companies as acceptable holdings for ESG funds in Europe might be disconcerting for some longtime proponents of sustainable investing.
“[Regulators] are saying it’s OK to invest in weapons,” she said. “That’s something that [ESG] investors a few years ago would never have accepted. It can create a little bit of confusion.”
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