ESG Investment Cools as the Sector’s Notoriety Grows

Since the start of 2019, investors have plowed more than $300 billion into environmental, social and governance (ESG)-themed exchange traded funds. Monthly investment has ebbed and flowed, but the annual trend has been on a consistent upward trajectory: $30 billion in 2019, $94 billion in 2020, and $159 billion in 2021.

Something happened this May, however. The biggest class of ESG ETFs had outflows for the first time in almost six years.

Bloomberg tracks three types of ESG exchange-traded funds: equities, which hold stock in companies; fixed income, which hold bonds; and commodities and alternatives, which hold … commodities as well as hedge funds, real estate and infrastructure funds. Total ESG inflows last month were barely positive, relatively speaking — about $400 million, whereas flows in 2021 averaged $11 billion and twice topped $20 billion. More importantly, equity flows were negative, with a bit more than $200 million leaving the universe of ESG ETFs.

Last month’s negative flow is also striking in the context of just how much money was going into ESG ETFs only a year and a half ago. In January 2021, more than $20 billion poured into ESG equity ETFs, a high-water mark that no other month of fund flows even approaches. The trend has been steadily downward for six months.

The resulting decline in equity ETF net flows — and the plateau in cumulative flows to the asset class — means that 2022 is now running behind 2020, and investment is at less than one-third the pace of 2021.

If May 2022 was a nadir in one way, it was an ESG peak in another. Using Google Trends to track ESG interest over time shows that last month was the high point for web searches for the term in the past five years. Looking at the data, we see a dramatic spike in the week of May 15.