Investment in sustainable funds, or ESG funds, has experienced a sharp decline in 2023. After the pandemic years when investment in ESG was at its peak, there has been a sudden sobering due to political controversies and concerns about ‘greenwashing,’ writes Reuters.
The boom in 2020 and 2021 was driven by low oil prices that encouraged investors to diversify away from fossil fuels. However, these investments fell out of favor in 2022 when energy prices surged.
Globally, funds classified as ‘responsible investment‘ recorded 68 billion dollars in net new deposits in 2023 as of November 30. This is a significant drop from 158 billion dollars for the entire year of 2022 and from 558 billion dollars for the whole of 2021.
The performance of these funds has often been better than the broader market, driven by their significant exposure to technology stocks, including some of the ‘Magnificent Seven’ like Apple and Alphabet, which have strengthened in recent months as the Federal Reserve hinted at the end of interest rate hikes.
The Dow Jones Global Sustainability Index had a total return of 21.7 percent year-to-date, while the S&P Global Broad Market Index subset focused on sustainability had a total return of 17 percent.
Decline in Europe
In 2022, this sustainability index was also better than the broader market, even as investors were losing money. It had a total return of negative 15.6 percent, while the broad index had a total return of negative 20 percent.
The total assets of ‘responsible’ funds amounted to $2.56 trillion as of November 30, an increase from $2.35 trillion at the end of 2022, according to LSEG Lipper. Excluding responsible funds, all other assets of global funds amounted to $52.6 trillion as of November 30, after recording a net inflow of $1.1 trillion during the year. Responsible funds have still outperformed other funds this year in attracting net new deposits relative to their total asset growth.
Inflows have been modest this year in Europe, which accounts for about 80 percent of sustainable assets globally. U.S. sustainable funds suffered outflows of $10 billion as of November, largely related to BlackRock’s decision to remove an ESG fund from its targeted fund portfolio.
