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U.S. ESG Funds Had the Worst Quarterly Outflows in More than 5 Years

ESG funds’ avoidance of traditional energy stocks cost them as shares of oil companies took off last year.

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Investors yanked the most money out of U.S. sustainable funds in more than five years last quarter, withdrawing a net nearly $6.2 billion to round out a tough year for environmental, social, and governance strategies.

The net flow of money into U.S. sustainable mutual and exchange-traded funds has diminished steadily since it hit a record high in the first quarter of 2021, according to a new report from
The decline comes as inflation, rising interest rates, and lingering fears of recession have weighed on markets and investor sentiment.

But that doesn’t explain the whole shift. The increasing politicization of ESG investing also hurt investment strategies that prioritize social and environmental issues, said Alyssa Stankiewicz, associate director of sustainability research at Morningstar and a co-author of the report.

Despite the bleak backdrop, there was some positive news: Sustainable funds netted more than $3 billion in flows in 2022, while traditional U.S. funds experienced more than $370 billion in withdrawals for the year. It was the first calendar year of net outflows since Morningstar began tracking data in 1983.

For the year, assets under management at U.S. sustainable funds stood at $286 billion.

As for performance, sustainable funds lagged behind the broader market, given their lack of exposure to traditional energy stocks, the best-performing sector of the
S&P 500
index with a gain of 66%. Communication services, consumer discretionary, and information technology lost 40%, 37%, and 28%, respectively. 

Funds that underweight the energy sector, as many sustainable funds do, suffered as a result. “Investors may have favored traditional energy exposure over energy-light sustainable funds given the relative return expectations,” said Stankiewicz in a blog post

While sustainable and traditional funds suffered outflows in the fourth quarter, those for sustainable funds were more severe when measured by so-called organic growth rates—net flows as a percentage of total assets at the start of a period—said Stankiewicz.

For the first quarter in more than three years, U.S. sustainable funds had a lower organic growth rate than the total U.S. fund universe. The organic growth rate “puts the magnitude of fund flows into perspective,” said Stankiewicz. During the fourth quarter, sustainable funds shrank by 2.2% compared with an 0.8% shrinkage in the overall U.S. landscape.

The three U.S. ESG funds that attracted the most net inflows in the fourth quarter were American Century Sustainable Equity (ticker: AFDAX), Calvert Equity (CSIEX), and the
iShares ESG U.S. Aggregate Bond ETF
(EAGG). Two funds that saw steep outflows were the
iShares ESG Aware MSCI USA ETF
(ESGU), which suffered $1.8 billion in net outflows, and Parnassus Core Equity (PRBLX), at $1.2 billion.

Global sustainable funds attracted $37 billion of net new money in the fourth quarter and assets under management rose to $2.5 trillion, up slightly from three months earlier.

Morningstar said its global sustainable fund universe encompasses mutual funds and ETFs “that, by prospectus or other regulatory filings, claim to focus on sustainability; impact; or environmental, social, and governance factors.”

One of the criticisms leveled at ESG over the past year is that there is no consensus over what the term ESG investing means.

“ESG isn’t well defined,” Hortense Bioy, global director of sustainability research at Morningstar and the lead author of the quarterly report, told Barron’s. “The industry needs to clarify what it means by ESG.”

Write to Lauren Foster at


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