ESG Backlash Causes Major Asset Managers to Go Quiet

The United States has witnessed significant outflows of investment from environmental, social and governance (“ESG”) funds in 2024. This can partially be attributed to the backlash that ESG has been facing, leaving many ESG asset managers at a loss as to how to address the situation.

A report authored by Morningstar indicates that $8.8 billion in net outflows was recorded by U.S. ESG funds during the first quarter of 2024. The bulk of those outflows were from investment funds that are actively managed along with two ETFs run by iShares.

Politicization of ESG in the U.S. has caused many asset managers to regard ESG as too risky. Some have even removed mentions of ESG from the marketing materials that they send out. Hortense Bioy, Morningstar’s global director in charge of sustainability research, says what has been happening over the past two years is getting worse. The backlash against ESG investing has dampened investor appetite, Bioy added.

Bioy reveals that sustainability funds underperformed comparable peer funds not focused on sustainability in 2022. This made investors more cautious about putting their money into sustainable funds, and the outflows from ESG funds starting ticking upward, riding on this and other factors.

It should be noted that the U.S. was the exception rather than the rule in terms of the direction of fund movement with regard to ESG. The rest of the world registered net inflows totaling $900 million. Europe led the charge in ESG interest as captured by the Morningstar data, which indicates that trades in Europe were to the tune of $11 billion in Q1 2024. This figure was double the activity registered during Q4 2023.

Japan was the only other major market in the world to see net outflows in Q1 2024, joining the U.S. in this trend.

Kiley Miller, Envestnet’s principal director responsible for sustainable investment, isn’t too sure that the massive net outflows in the U.S. are due to dampening investor interest. Miller says it is possible that fewer inflows are because fund managers have become cautious about discussing ESG investment with their potential and current clients. If they don’t talk about it, clients are unlikely to know that such an investment opportunity exists.

Miller’s view seems to be supported by the toning down of mentions of sustainable investing by many asset funds. J.P. Morgan, Vanguard, Invesco, Pimco and State Street are examples of major investment funds that have rescinded their membership of umbrella entities such as Climate Action 100+. Such reversals may have impacted investor awareness of ESG funds, and fewer inflows were causing outflows to reach unprecedented levels.

While investment funds are seeing massive outflows from their ESG initiatives, more publicly-traded companies such as Reflex Advanced Materials Corp. (CSE: RFLX) (OTCQB: RFLXF) are integrating ESG norms in their operations, and the entities are convinced that it will benefit them in the long-term.

NOTE TO INVESTORS: The latest news and updates relating to Reflex Advanced Materials Corp. (CSE: RFLX) (OTCQB: RFLXF) are available in the company’s newsroom at https://ibn.fm/RFLXF

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