TAN - Deeper Dive: Investor exodus from ESG investing

2023-06-13 11:49:25 ET

Wall Street investors have watched an exodus of investor capital mount over the course of 2023 as it pertains to environmental, social, and corporate governance investing, while the broader market has advanced.

Not only have market participants seen money flow away from the ESG arena, but they also have observed closures of a handful of exchange traded funds that focus on ESG investing, along with a shift in market commentary about the importance of ESG during the latest quarter of earnings.

Capital Outflows

The shift away from ESG has been in the making for some time. ESG inflows peaked in the U.S. and across the world in 2021, but came down during the downturn of 2022 and are continuing their outflows in 2023. In fact, 2020 U.S. annual ESG fund inflows reached $51.8B. They rose to $69.8B in 2021, and fell to just $3B in 2022.

Moreover, the same trend has also been observed across the rest of the world and in Europe where ESG standards are much stricter.

With the first five and a half months of trading in the rearview mirror, investors will have noticed that some of the markets most prominent ESG and environmentally friendly exchange traded funds have watched billions of dollars worth of capital exit the door. Seven popular ESG focused funds cumulatively have observed the retraction of $8.35B in 2023.

See outlined below the seven exchange traded funds along with their year-to-date fund flow records.

• iShares ESG MSCI USA ETF ( NASDAQ: ESGU ) -$7.24B
• iShares Global Clean Energy ETF ( NASDAQ: ICLN ) -$417.97M
• iShares MSCI USA ESG Select ETF ( NYSEARCA: SUSA ) -$287.16M
• Invesco Solar ETF ( TAN ) -$243.94M
• First Trust NASDAQ Clean Edge Green Energy Index Fund ( QCLN ) -$115.69M
• Vanguard ESG U.S. Stock ETF ( ESGV ) -$30.32M
• iShares ESG Aware MSCI EAFE ETF ( ESGD ) -$14.34M.

On the flipside, anti-ESG ETF B.A.D. ( NYSEARCA: BAD ), which aims to provide exposure to companies involved in segments such as gambling, alcohol, cannabis, and drugs (pharmaceuticals and biotechnology) has actually attracted net new money in 2023.

Fund Closures

Not only are some ESG ETFs noticing capital outflows, a handful of others have actually liquidated and closed up shop. Below are four funds that have been liquidated since the start of the trading year.

• SPDR Bloomberg SASB Corporate Bond ESG Select ETF ( RBND )
• SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF ( RDMX )
• SPDR Bloomberg SASB Emerging Markets ESG Select ETF ( REMG )
• Invesco US Large Cap Core ESG ETF ( IVLC )

ESG Not Being Mentioned

Overall, less companies are discussing ESG as a focus point when looking at the latest round of earnings from March 15th through June 9th. According to FactSet , out of all the S&P 500 earnings conference call transcripts, just 74 firms cited the term "ESG."

For a frame of reference, ESG was cited 156 times in 2021 Q4 earnings conference calls which was the all-time quarterly high. Since Q4 of 2021 there has been a steady decline of earnings calls that site ESG. The quarterly declines went from 156 to 139, 115, 95, 96, to the current 74 citing's in the previous Q2 of 2023.

Not only have talking points dwindled around ESG, but some have outright stepped up and spoke out against the stance of “impact investing.”

Most popularly, back in May of 2022, Elon Musk's EV giant Tesla ( TSLA ) got booted out of the S&P 500's ESG Index in which he responded by stating : "A clear case of wacktivism. Exxon is rated top ten best in world for environment, social & governance ESG by S&P 500, while Tesla didn't make the list! ESG is a scam. It has been weaponized by phony social justice warriors.”

It should be noted that a year later, in April 2023, Tesla was reincluded in the index without changing any of its practices, highlighting another cryptic angle of ESG investing - the lack of concrete standards.

Furthermore, according to the S&P global ratings ESG evaluation scores which are graded out of 100, show that many companies are listed noticeably higher than the EV firm. For instance, Philp Morris International ( PM ) is given a 62 while TSLA sits at a 37, despite the fact that cigarettes cause hundreds of thousands of deaths each year.

Not All ESG Has Suffered

While there may be many concerns about ESG investing, one thing that can't go unnoticed is the fact that the S&P 500 ESG Index has outperformed the traditional benchmark S&P 500 Index ( SP500 ) so far in 2023. The S&P 500 ESG Index is +14.7% whereas the traditional S&P 500 index is +13.5% year-to-date.

More on ESG Investing:

• DWS Xtrackers Climate ETF becomes largest ETF launch in history with $2B
• BlackRock plans to launch a climate transition-focused ETF
• No Meaningful Difference Between ESGU And SPY

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