A mobile billboard passed by the U.S. Capitol on May 10, 2023, capturing a moment that highlights the currents of change within the financial world, particularly in ESG funds. Image courtesy of Jemal Countess and Getty Images.
Investors have, in recent years, withdrawn their support from ESG (Environmental, Social, and Governance) funds. This has been due to political backlash, high interest rates, and other challenges. However, analysts remain optimistic about the future and long-term rationale supporting this investment category.
“President Donald Trump’s policies aren’t the end for ESG investing,” Diana Iovanel, a senior markets economist at Capital Economics, stated in her latest research. While political pressures remain strong, she argued that the demand for ESG investments is unlikely to wane.
Known by various names such as sustainable, impact, or values-based investing, ESG funds align with certain value principles, such as climate change initiatives or promoting corporate diversity. Despite a hefty withdrawal, with nearly $20 billion removed from U.S. ESG mutual and exchange-traded funds in 2024, investors still funneled $740 billion into the broader mutual funds and ETFs universe in the same year, as per Morningstar.
Hortense Bioy, leading sustainable investing research at Morningstar, mentioned the backlash against ESG in the U.S. political environment. Critics often dismiss ESG as “woke capitalism” sacrificing returns for liberal agendas. Yet, advocates argue that companies with ESG practices are usually more resilient, setting the stage for higher long-term returns compared to their peers.
Despite two years of consecutive outflows in 2023 and 2024, ESG funds had enjoyed a period of robust growth. Over the past decade, $130 billion flowed into U.S. ESG funds, hitting record highs in 2020 and 2021, with $50 billion and $70 billion respectively. Even with the recent outflows, market appreciation meant overall ESG fund assets saw a slight uptick in 2024 to $344 billion.
The political climate, especially under President Trump, has posed hurdles for ESG. His tenure saw significant moves like pulling out of the Paris agreement and resisting diversity and inclusion policies. Moreover, over a dozen Republican-led states’ “anti-ESG legislation” dampened enthusiasm, leading some big asset managers to scale back their efforts. This resulted in a contraction of ESG fund offerings, from 646 in 2023 to 587 in 2024—the first time such a decline occurred.
Non-political factors have also played a role in the challenges faced by ESG funds, with high interest rates standing out as a significant deterrent, impacting capital-intensive sectors like clean energy. ESG funds haven’t performed as expected in recent years, a trend further exacerbated by surging oil and gas prices following the 2022 Russian invasion of Ukraine. However, they previously outperformed significantly in 2020, with US ESG stock funds leading peers by around 4 percentage points.
According to Jennifer Coombs at the U.S. Sustainable Investment Forum, the key objective of ESG investing is managing long-term risk without compromising returns. ESG isn’t philanthropy; rather, it’s a strategic approach intended to deliver strong investment returns over the long haul.
“Sustainability requires patience and a long-term perspective,” Coombs emphasized, underscoring the enduring value of ESG principles in investment strategies.
