After the Pandemic Ends... ESG Fund Popularity Plummets

Poor Returns of ESG Funds Amid High Interest Rates
Only Six ESG Funds Launched in the US in the Second Half of Last Year
Similar Trends Also Detected Domestically

In the United States, the popularity of ESG (Environmental, Social, and Governance) funds is rapidly declining. Amid ongoing high inflation and high interest rates, stricter regulations by authorities and political backlash have led to poor returns for ESG funds. Investment sentiment regarding ESG has also weakened, causing capital to flow out.

According to global investment analysis firm Morningstar on the 10th, only six ESG funds were launched in the US in the second half of last year. This represents a nearly 90% drop compared to the previous first half of the year (55 funds). During the 2020?2022 period, when the COVID-19 pandemic crisis was ongoing, an average of 100 ESG funds were launched annually. Global asset management companies such as BlackRock and Vanguard actively incorporated ESG management practices into their investment decision-making, and companies increased ESG activities to attract investment.

ESG funds are those that select and include companies with strong financial factors such as sales and profits, as well as non-financial factors like sustainability. They gained attention as environmental protection and other values emerged as corporate responsibilities in response to the global disaster caused by the COVID-19 pandemic.

However, the situation reversed as the high interest rate environment driven by inflation continued. The returns of ESG funds, which promote eco-friendliness, have been poor. As a result, there is an increasing number of investors questioning whether activities such as social contribution and animal welfare can actually enhance a company's sustainability. According to the Wall Street Journal (WSJ), over $14 billion was withdrawn from ESG funds between January and September last year.

Additionally, stricter regulations to filter out funds that only nominally claim to be ESG have also affected the decline in ESG fund popularity. Since September last year, the U.S. Securities and Exchange Commission (SEC) has introduced a fund rule requiring that at least 80% of a fund’s assets be invested in companies that align with the fund’s name. Asset management firms must comply with this rule for at least two years.

Asset managers, uncertain about guaranteeing returns, are changing the names of ESG funds. Aberdeen plans to remove the phrase "sustainable leaders" from two of its four funds containing the term next month. Instead, they will focus on financial factors such as companies’ revenue models when making investments. Morgan Stanley and UBS were also confirmed to have removed ESG-related terms from some fund names last year.

The WSJ reported, "Many U.S. companies, including Coca-Cola, no longer use ESG terminology in their corporate reports." This is to avoid investor backlash, political pressure, and legal threats.

According to FactSet, the number of S&P 500 companies mentioning ESG in earnings calls decreased from 155 in Q4 2021 to 61 in Q2 2023. Ken Paxton, Attorney General of Texas who opposes ESG policies, stated in a press release, "These CEOs have likely realized that legal risks are increasing and consumer costs are rising."

The popularity of ESG funds is also cooling in South Korea. According to the Korea Exchange, the ESG-related ETF 'ARIRANG ESG Excellent Companies' (managed by Hanwha Asset Management) was delisted on the 15th of last month.

This content was produced with the assistance of AI translation services.