ESG Funds Underperforming S&P 500, Streak Expected to Continue Through 2023

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Nov. 29, 2022. Brendan McDermid/Reuters

Several investment funds that adhere to environmental, social, and governance (ESG) policies have performed worse than the S&P 500 index this year, with the underperformance of such funds potentially set to continue through 2023 as well.

A Bloomberg analysis of the 10 largest ESG funds by assets reveals that they have all registered double-digit losses. While the S&P 500 declined by 14.8 percent as of Dec. 5, eight out of these ESG funds have declined even more. Topping the list of losers was Brown Advisory Sustainable Growth Fund which fell by 28.1 percent, which was almost double the loss of the S&P 500. As of end of October, two-fifths of the fund’s assets were in internet, software, and semiconductor stocks.

Two more funds registered losses in excess of 20 percent while four funds saw losses exceeding 15 percent. The fund that posted the smallest loss, TIAA-CREF Core Impact Bond Fund, declined by 13 percent. Unlike other funds on the list, this is a fixed-income fund. On average, ESG-labeled stock funds with assets in excess of $500 million have fallen by 12 percent.

Many expect ESG funds to underperform the broader market in 2023 as well. A Bloomberg survey from November found that 65 percent of respondents expected such a trend.

Out of the 691 respondents, 264 foresee ESG funds to “slightly underperform,” while 184 expect these funds to “significantly underperform.”

“Given the challenges of 2022, there will be some recovery next year, but it will remain mixed,” owing to economic issues like inflation, Fionna Ross of Edinburgh-based fund manager Abrdn Plc said about ESG funds in an interview with the media outlet.

Meanwhile, in a recent study (pdf) regarding the value placed on ESG, investors were found willing to be charged a higher fee for ESG funds in return for their financial and non-financial benefits.

Investors were, on average, willing to pay 20 basis points more per annum for ESG funds when compared to a fund without an ESG mandate.

“When we incorporate the possibility that investors are willing to accept lower financial returns in exchange for the psychic and societal benefits of ESG, we find that the implicit value that investors place on ESG stocks is higher still,” the study said.

State Actions Against ESG

ESG funds have attracted criticism from lawmakers. In a recent letter to two executives, six Republicans on the House Judiciary Committee blamed the governance ideology for stifling investment in oil and gas as well as pushing progressive policies like abortion access and gun control.

It cited a Wall Street Journal op-ed from June that argued that advancing the ESG agenda requires owners of capital goods to collude in order to limit the supply of certain goods and services, which would qualify as an antitrust violation.

“Woke corporations are collectively adopting and imposing progressive policy goals that American consumers do not want or do not need. An individual company’s use of corporate resources for progressive aims might violate fiduciary duties or other laws, harming its viability and alienating consumers,” the lawmakers wrote.

States have begun pulling out money from investment firms adopting ESG-aligned stances. In October, Louisiana announced that it will divest $794 million placed under BlackRock’s management. In December, Florida announced pulling out $2 billion managed by the investment firm.

States like Missouri, Utah, and Arkansas have announced similar decisions over worries that pro-ESG investment firms will steer investors away from fossil fuels.

On Dec. 7, investment firm Vanguard Inc. announced it was quitting a climate initiative called Net Zero Asset Managers initiative after it faced pressure for using ESG factors in its investment decisions.