A clarifying time for sustainable investing

Sustainable investing is languishing in the US – at least as a mainstream concept – as the biggest asset managers cut products and show less support for ESG in proxy votes.

Money has been pouring out the category, too. Last year, about $19.6 billion left US open-end mutual funds and ETFs with sustainable strategies, data from a recent Morningstar report show.

Amid that, fund shops closed or repurposed 55 funds, up from 45 in 2023. Fund launches plummeted compared with those of recent years, with just 10 products appearing on the scene in 2024, according to Morningstar.

And facing pressure from politicians at the state and federal level, the biggest asset managers showed far less support for shareholder resolutions with environmental, social, or governance aims than they did in the past. All those factors put the US at odds with other countries across Europe and Asia, where sustainability has continued to attract assets and attention.

That might make it sound like it’s a difficult time to guide clients on sustainable investing – but advisors say that’s not necessarily the case. Although big firms like BlackRock and Vanguard have distanced themselves from the category, there are plenty of others that, so far, appear less willing to back off from ESG.

“I view it as a natural market correction – one that clarifies which firms are truly committed to ESG and which were just riding the trend. For advisors, this means we have to be more selective, focusing on funds and strategies with strong, transparent sustainability mandates rather than those that simply checked the ESG box for marketing purposes,” said Daniel Milks, cofounder of Woodmark Advisors, in an email.

The politicization of ESG has frustrated clients, though the demand hasn’t subsided, he said.

“Because of that, some are looking beyond ESG to alternative approaches like biblically responsible investing (BRI) or broader ethical investing, which often provide clearer alignment with personal values without the baggage that ESG has accumulated,” he said.

Now, the challenge is identifying funds that align with clients’ values and have strong performance records, he said. But it’s also a potential opportunity to consider other options, including impact investing and private investments, which may provide more “meaningful sustainability impact,” he said.

Last year, BlackRock supported 10 percent of major ESG-themed shareholder resolutions, down from a rate of 52 percent in 2021, according to a separate Morningstar report last week. Vanguard supported zero such resolutions, compared with a high of 37 percent in 2021. Other firms that don’t market themselves as sustainability shops had much higher rates of support for ESG resolutions. For example, Principal voted in favor of 90 percent last year, while Pimco did so for 96 percent, and Franklin Templeton supported 75 percent, Morningstar found.

While the high number of sustainable fund closures last year hints at a retreat from ESG commitments due to political pressure, performance has also been a headwind for many sustainable funds recently, said Daniel Masuda Lehrman, founder of Masuda Lehrman Wealth, in an email.

“The next few years will likely reveal which asset managers are genuinely committed to sustainability and responsible investing,” he said. “The bright side is that this allows investors to better identify investment firms that prioritize long-term ESG strategies.”

Those who see the value and responsibility in sustainable investing will remain committed to it, despite ongoing political pushback, advisors said.

“Sustainable investing has come a long way in recent years. Eighty-five percent of large-cap companies now report carbon emissions data because investors demand it. Rating a company on ESG criteria has become more straightforward as available data becomes increasingly standardized,” said Cathleen Tobin, owner of Moonbridge Financial Design, in an email. “By rewarding the companies with the strongest ESG practices and avoiding the worst offenders in each sector, a high-quality ETF can maintain the diversification needed to perform comparably to major indices like the S&P 500 or Russell 3000, if that is a stated objective.”