Evening Brief – 07.25.23

Investors pulled $635 million from environmental, social and governance (ESG) funds in the second quarter; the third straight quarter of net redemptions from sustainable funds, according to Morningstar research.

The withdrawals are an improvement over the $5.2 billion yanked in the first quarter, but still bring ESG fund redemptions to $5.8 billion for the year so far and $11.4 billion for the year through June 30.

The withdrawals contrast with the overall funds and ETFs market, which has seen a net $34.8 billion inflow ($213 billion into ETFs, $178.2 billion out of mutual funds).

A total of $528 million was returned to investors from active strategies, and around $100 million was taken out of passive ESG funds. These results mirror those seen across the whole fund industry.

This was a considerable improvement from the first quarter, which saw $6.1 billion withdrawn from passive ESG funds. This was largely a result of BlackRock’s decision to drastically reduce exposure to the iShares ESG Aware MSCI USA ETF in its model portfolios. Consequently, $6.4 billion left the fund.

The iShares ESG Aware MSCI USA ETF continued to experience outflows, with another $679 million leaving, bringing assets to $14.6 billion. This means the portfolio is no longer the largest ESG fund, sliding to third place, with the top slot now occupied by the Parnassus Core Equity fund, which had $26.9 billion at the end of the quarter.

Even though flows were negative, the number of ESG funds rose by 11% during the first half of the year, reaching 656. Additionally, the assets in these products increased over the quarter, reaching $313 billion due to the equity market rally. However, they are still 13% behind their all-time peak of $358 billion at the conclusion of the fourth quarter of 2021.