ESG ETFs in peril as billions of dollars exit

Top ETF analyst warns of 'tons of closures coming up'

ESG ETFs in peril as billions of dollars exit

Environmental, social, and governance (ESG) funds, once the darling of the investment world, may be facing a watershed moment as billions of dollars in assets have cleared out of the segment this year alone.

Once-bullish asset managers are increasingly shying away from the politically charged investment strategy and are even stripping the terminology from exchange-traded funds.

Some analysts are predicting a major course correction, with senior ETF analyst at Bloomberg Intelligence, Eric Balchunas, warning of “tons of closures coming up.”

The demand for ESG ETFs was so grossly overestimated. There’s going to be tons of closures coming up," he said.

Investors are pulling out of ESG-labelled ETFs due to political backlash and trailing returns, resulting in a collective loss of $5.8 billion year-to-date for domestic ESG-labelled ETFs. Just two years ago, the industry was booming, with ESG funds attracting nearly $32 billion in 2021 and 209 ESG-listed ETFs with $90 billion in assets hitting U.S.-listed markets in the last two decades.

The iShares ESG Aware MSCI USA ETF (ESGU), the largest ESG index fund, has been hit particularly hard, losing nearly $6.3 billion year-to-date and recently posting its largest one-day loss of $4 billion. BlackRock, which oversees the fund, declined to comment on the movement.

Balchunas added that ESG has gathered "a lot of baggage," including political and return baggage, making it a political football of a term. This sentiment reflects a broader anti-ESG sentiment.

Political fallout and backlash

The criticism of the ESG investment strategy and methodology has been brewing for some time now, although it gained traction in recent months. Some ETF providers have even removed the ESG label from their products.

For example, in February, VictoryShares ETFs, which manage nearly $8 billion across 25 U.S.-listed products, removed "ESG" from two of their bond ETFs.

Similarly, Inspire ETFs, based in Idaho, removed "ESG" from eight of their fund titles in August.

In a company statement, Inspire Investing CEO Robert Netzly explained that they no longer want to associate their investment approach with the ESG category due to the increasing leftist intolerance and hostility in recent months.

BlackRock, the parent company of iShares, the issuer of ESGU, the world's largest ETF issuer, has lost over $1 billion from Republican-led states who have expressed concerns about ESG.

Meanwhile, Democrats have criticized the firm for not being ESG enough. In September, Brad Lander, the New York City Comptroller, called out the company for the "fundamental contradiction between BlackRock's statements and actions."

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