Why The ESG Craze Is Fading On Wall Street

Wall Street rushed to embrace sustainable investing just a few years ago. Now it is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions.

The about-face comes after tightened regulatory oversight, higher interest rates that have slammed clean-energy stocks, and a backlash that has made environmental, social, and corporate governance (ESG) investing a political target. [emphasis, links added]

“This really is the result of too many managers looking to cash in on increased awareness and demand for ESG investments,” said Tony Turisch, senior vice president at Calamos Investments.

The third quarter was the first time more sustainable funds liquidated or removed ESG criteria from their investment practices than were added, according to Morningstar.

Source: Morningstar Direct

That is a reversal from not that long ago when companies were rebranding faltering funds to cash in on the billions of dollars flowing into sustainable investment products.

In 2021, Hartford Funds inserted “sustainable” into the name of its core bond product and subsequently saw investors pour $100 million into it. But after missing its performance targets last year, Hartford is switching gears again.

Later this month, the bond fund will be known as the Core Fixed Income Fund and potentially sell some of the holdings that made it sustainable when it pivots to a conventional investment strategy, according to company filings.

Hartford declined to comment on why it is rebranding the fund.

At least five other funds also announced they would drop their ESG mandates this year, while another 32 sustainable funds will close, according to data compiled by Morningstar and The Wall Street Journal.

[According to Morningstar,] the retreat comes after investors withdrew more than $14 billion from sustainable funds this year, leaving them with $299 billion.

Conventional funds also lost money, but the pain was more acute for climate and other thematic products hit by high-interest rates and other factors.

Ron Rice, vice president of marketing at Pacific Financial, said a legal fight over the Labor Department’s rule letting retirement fund managers consider ESG factors may have weighed on the popularity of his firm’s sustainable products.

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“We found that the demand for ESG investing, by financial professionals working with retirement-plan participants, was more limited than we anticipated,” he said.

Earlier this year, Pacific Financial removed sustainability from the name of three mutual funds then-holding more than $187 million. All three funds subsequently saw their assets under management jump, Rice said.

Political pressure could be a factor in the changes as well. Republican presidential candidate Vivek Ramaswamy has been a vocal ESG critic.

Last year, Florida said it was pulling $2 billion of its assets managed by BlackRock partly due to the company’s support of ESG.

Read rest at WSJ

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