The upcoming closures of two of JPMorgan’s socially conscious exchange-traded funds are shining a spotlight on the vanishing appetite for environmental, social and governance products.
An unprecedented $7.7 billion has left do-good ETFs this year following 10 straight years of inflows, Bloomberg Intelligence data show. Issuers have shut down a record 14 ESG funds so far in 2023 amid the outflows, with the JPMorgan Sustainable Consumption ETF (CIRC) and JPMorgan Social Advancement ETF (UPWD) set to be liquidated by year-end, according to a press release Thursday.
The conversation around principles-based investing is increasingly intertwined with politics. After positioning his firm as a leader in the space, BlackRock Inc. Chief Executive Larry Fink famously said this year that he’s retiring what has become a "weaponized" label after facing outcry from Republican politicians, who pulled billions in state funds from his company.
That degree of politicization is spoiling the appetite for ESG among financial advisers, said Nate Geraci of The ETF Store.
“Financial advisers who drive ETF flows are typically hesitant to mix politics with portfolios — it’s simply not good business for them,” said Geraci, president of the advisory firm. “The political polarization around ESG investing has led to a lack of adviser appetite for related ETFs and now has issuers pulling back from the space.”
Both CIRC and UPWD are being shuttered after just over a year in existence. In that time, both funds have only seen a single day of inflows — just over a million dollars a piece more than a year ago, according to data compiled by Bloomberg.
It’s a starkly different picture than the halcyon days of ESG investing in 2021 and 2022. Nearly $40 billion flooded into such ETFs over those two years as issuers and a handful of deep-pocketed investors plowed into the products.
However, that dynamic created concentration risk among the investor base, leaving the ETFs vulnerable to dramatic outflows as sentiment shifts. The current political backlash could hinder ESG from gaining wider adoption, according to Bloomberg Intelligence.
“The slowdown in ESG ETF asset growth that started in 2022 was due to the reliance on a small pool of investors, we believe, a concentration that could make growth cyclical and pose the risk of further weakness if large investors exhaust allocations,” Bloomberg Intelligence’s Shaheen Contractor wrote in a report. “A backlash against ESG factors in the U.S. could prolong the problem by preventing a much-needed expansion of investors.”
Thirty four percent of advisors surveyed by InvestmentNews say they use direct indexing strategies but 39 percent don’t.
“This is on the B. Riley Securities side of the business, the dealmaking side,” one senior industry executive said.
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