- ESG funds saw their lowest global annual cash inflows since 2018.
- U.S. ESG funds assets dropped 20% in the second quarter of 2022, the first quarterly net outflow in five years.
- Criticism and scrutiny of ESG funds increased, but so did support from the U.S. and E.U. governments.
Global cash flows into funds focused on investments adhering to specific environmental, social, and governance (ESG) standards sank dramatically last year amid a complicated mix of market turbulence, heightened scrutiny from U.S. states and municipalities, and increased support from the E.U. and U.S. governments.
Net inflows—subtracting investors' redemptions from new and additional investments—into ESG mutual funds and exchange-traded products plummeted 76% to $157.3 billion in 2022 from $649.1 billion in 2021, according to Morningstar data. Last year marked the lowest annual net inflow for ESG funds since $69 billion in 2018.
Europe, the earliest promoter of ESG standards and accounting for about 80-85% of all global ESG fund assets, captured 90% of global ESG fund net inflows last year. However, that amount—$141.5 billion—fell 73% from $527.1 billion in 2021.
U.S. ESG funds garnered $10.4 billion in net inflows in the first quarter of 2022 but suffered quarterly outflows for the first time in at least five years in the second quarter. Combined assets for U.S. ESG funds dropped 20% to $286 billion last year, accounting for just 11% of the world's $2.5 trillion in ESG fund assets.
U.S. ESG fund assets were hit hard last year by falling equities. One of the largest U.S. funds, Parnassus Core Equity Fund (PRBLX), fell 26% in 2022, compared to a 19.44% decline for the S&P 500. Other major funds, like the iShares ESG Aware MSCI USA ETF (ESGU) and Vanguard ESG U.S. Stock ETF (ESGV), saw similar declines of 20% and 24%, respectively.
Overall, ESG funds account for a small portion of the world's assets under management, which reached $126 trillion in 2022. Inflows plunged for non-ESG funds last year, as well, amid broader declines in global stock and bond markets as central banks raised interest rates to reduce inflation.
In the U.S., open-end mutual funds and exchange-traded funds (ETFs) had net outflows of $370 billion in 2022—the first time they've suffered annual net outflows since data tracking began in 1993.
U.S. open-end funds and ETFs have $23 trillion in assets—80 times more than domestic ESG funds and ETFs. Still, U.S. ESG products had $358 billion in assets heading into 2022, about four-and-a-half times more than just four years earlier.
Supporters and Critics
The popularity of U.S. ESG investments surged partly because more U.S. corporations began implementing ESG standards. Last year, the U.S. government also approved changes to fiduciary standards that made ESG funds more appealing for 401(k) retirement plans.
At the same time, ESG investments have attracted criticism for a variety of reasons. Those include questions regarding how well fund managers pay attention to the ESG qualifications of the companies in which they invest and how stringently companies themselves actually monitor the ESG standards they claim to promote.
In addition, the simple notion of ESG investing, which generally avoids manufacturers of products ranging from fossil fuels to cigarettes and alcoholic beverages, rankles some.
Several states have prohibited state and local municipalities from investing in funds or firms that specifically avoid oil and gas producers or other companies viewed as defying ESG standards.
The Securities and Exchange Commission also reportedly may ease certain aspects of regulations proposed last year that would require companies to disclose detailed accounting of climate-related expenses. Currently, companies only report costs from extreme weather and other climate-oriented factors that they consider significant for investors.
The EU's embrace of ESG remains much stronger. New regulations in the EU soon will considerably expand the scope and content of ESG reporting standards. Those rules will apply to EU companies and companies based outside the continent that meet certain reporting thresholds and do business within it.