Republican-led pushback against a controversial investing movement that critics decry for pushing "woke" political causes appears to be having an impact.
U.S. sustainable funds, which use ESG criteria to evaluate investments or assess their societal impact, sank to their lowest level in more than five years by bleeding over $6 billion during the fourth quarter of 2022, according to a report from financial services firm Morningstar.
ESG, short for environmental, social, and governance investing, is based on the concept that investors should use these three broad categories when evaluating where to put their money, prioritizing progressive values and "social responsibility" when making financial decisions.
Sustainable funds netted more than $3 billion in 2022, boosting their assets to $286 billion and performing better for the year than other U.S. funds. However, nearly all the inflow into ESG funds occurred during the first quarter as demand for them has steadily declined over the least two years.
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According to Morningstar, investors pulled their money for a variety of reasons, including high inflation, rising interest rates, risk of an impending recession, poor market returns, and "greenwashing" — the practice of companies deceptively promising to be environmentally friendly but not living up to their promises.
Another factor was political backlash against ESG.
"In the United States, prominent politicians have spoken out against ESG investing, and some have taken measures to limit state investment funds from doing business with asset managers based on perceptions of those managers' ESG approaches," the report stated. "Although both sustainable funds and their conventional counterparts saw outflows in the fourth quarter, the short-term withdrawals were more severe for sustainable funds."
ESG has become a politically explosive issue over the past couple years.
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The theory underpinning ESG is that corporations should deemphasize their traditional responsibility to maximize value for shareholders and instead make new commitments to alternative stakeholder groups, serving other interests and society at large.
Many investors now use ESG as a rating system to measure a company's advancement of policies designed to address climate change, increase corporate board demographic diversity and support a progressive "social justice" agenda, among other initiatives.
ESG has become increasingly influential in recent years, evolving into a roughly $35 trillion industry, with that much in global assets being invested using ESG principles.
By 2025, global ESG assets are expected to exceed $53 trillion, representing more than one-third of the $140.5 trillion in projected total assets under management.
However, critics of what they describe as "corporate wokeness" have been mobilizing against the march of ESG advocates, arguing the financial movement is a way to push left-wing causes through business rather than the legislature.
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Republican leaders on the House Financial Services Committee are creating a task force to coordinate their response to various proposals related to ESG.
"Progressives are trying to do with American businesses what they already did to our public education system — using our institutions to force their far-left ideology on the American people," Financial Services Committee Chairman Patrick McHenry, R-N.C., told Fox News Digital earlier this month. "Their latest tool in these efforts is environmental, social, and governance proposals. This is why I am creating a Republican ESG working group led by Oversight & Investigations Subcommittee Chair Bill Huizenga."
Sen. Joe Manchin, D-W.Va., recently joined Republican lawmakers in introducing legislation meant to block a new rule implemented by the Biden administration rule that allows managers to factor environmental and social issues into investment decisions for the retirement funds of more than 152 million Americans.
At the state level, red states have begun implementing measures to push back on ESG policies.
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In Kentucky, for example, State Treasurer Allison Ball last month threatened to pull state pension funds from about a dozen companies — including banks and major asset managers such as BlackRock, Citigroup, and JPMorgan Chase, if they continued boycotting the oil and gas industry.
Around the same time, Florida prohibited state-run fund managers from taking ESG factors into consideration when making investments.
"Thanks to the leadership of Governor [Ron] DeSantis, the Florida cabinet reaffirmed today that we don't want a single penny of our dollars going to woke funds," Florida Chief Financial Officer Jimmy Patronis said in a statement at the time. "We need asset managers to be laser focused on returns and nothing more. Florida's not going to subsidize the actions of a bunch of Leftist ideologues who hate America; we're not going to let a bunch of rich people in Manhattan or Europe try to circumvent our democracy."
Critics argue companies are violating their fiduciary responsibilities to their shareholders by sacrificing the main financial objectives of the company for a "woke agenda" and not doing what the shareholders want.
BlackRock CEO Larry Fink, one of corporate America's biggest promoters of ESG, responded to such criticism in a letter he penned to CEOs last year.
The ESG movement "is not about politics. It is not a social or ideological agenda. It is not 'woke,'" wrote Fink. "It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper … Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company's success."
In December, Patronis announced that Florida would dismiss BlackRock as manager of about $600 million in short-term overnight investments and an additional $1.4 billion in long-term securities.
Two months earlier, Missouri pulled $500 million in state pension funds from BlackRock. Meanwhile, Louisiana removed $794 million from BlackRock funds. Both states said that BlackRock’s ESG commitments were the reason for their divestments.
In Texas, State Comptroller Glenn Hegar declared in August that BlackRock and other asset managers were boycotting the Texas fossil fuel industry, prompting the state's pension fund to divest from the firms.
Such efforts may be bearing fruit. According to Morningstar, sustainable funds shed $2.4 billion during the fourth quarter, their steepest outflows in more than three years. Meanwhile, active sustainable funds bled $3.8 billion, causing these funds to land in negative territory for 2022 with a $1.3 billion net outflow.
Overall, 2022 was a bad year for U.S. funds. All mutual and exchange-traded funds suffered more than $370 billion in withdrawals, marking the first year of net outflows since Morningstar began tracking data in 1993.
