Anti-ESG funds have emerged recently in the U.S. as a response to the political environment and the success of sustainable investing — but the new products have been slow to catch on.
That's according to a report Wednesday from Morningstar, which examined the performance, sales, composition and proxy voting habits of mutual funds and ETFs that market themselves either as anti-ESG or as an alternative to sustainable investing.
Among the 27 anti-ESG funds on the market, the majority launched or reclassified themselves over the past year, authors Alyssa Stankiewicz and Mahi Roy wrote. Sales jumped at the start of the product proliferation, but they have since slowed down considerably.
As of the end of March, assets in the funds totaled about $2.1 billion, a level seven times that seen a year prior. Those products saw their highest sales period during the third quarter of 2022, at $376 million, with most of that going into the Strive U.S. Energy ETF, according to Morningstar.
“Strive looked poised to continue this momentum when it launched seven more funds over the following three months, but what started as a downpour quickly lost steam,” the authors wrote. “The second fund — Strive 500 ETF STRV — picked up $33 million in its first month on the market, and the following six funds attracted less than $5 million on average in each month since launch.” The firm's Emerging Markets Ex-China ETF picked up $103 million at its inception in January, but flows to that product have also slowed, according to the report.
Strive’s funds also represented most of the recent demand. Between the fourth quarter of 2017 and the second quarter of 2022, anti-ESG funds bled $1.2 million on average per quarter, while the broader market of U.S. equity funds saw net inflows of just under $1 billion per quarter, the report noted.
Over the past four quarters, however, sales for anti-ESG funds have been solidly net positive, while there were about $438 billion in outflows from all U.S. mutual funds and ETFs, according to data from Morningstar Direct. During that time, about $12.4 billion spilled out of sustainable funds.
Nineteen of the 26 funds Morningstar identified as being anti-ESG had only two quarters of performance history to consider, although the products did show stronger net returns recently compared with Morningstar’s U.S. Market Index, at 17% and 15% on average.
However, the sample of funds is varied and the timetable of performance history is short, meaning that the results don't necessarily reflect broader trends, the report noted.
But to their credit, about half of the funds have Morningstar medalist ratings, showing that the firm “has some degree of confidence in their ability to outperform peers or relevant benchmarks.” Those 12 funds are all passively managed, and part of the reason for their expected outperformance is that they have low fees, the authors noted.
Another six funds were rated as neutral, and six more had negative ratings.
“The oldest anti-ESG fund — USA Mutuals Vice — also earns a Negative Morningstar Medalist Rating, dragged down by costly expenses, new management and a tendency toward low-quality, high-volatility stocks,” the report read. “These traits give the portfolio less ballast than peers during economic downturns, increasing the pressure on management during economic booms.”
The anti-ESG funds in the report are classified as either outright anti-ESG (use ESG data to invest in funds “penalized by ESG ratings providers"), political (pro-conservative values), renouncers (have reversed prior ESG stances), vice (invest in stocks excluded by sustainable funds) and voters (passive funds that vote against ESG-themed shareholder resolutions).
Only one such fund fit the outright anti-ESG category — the Constrained Capital ESG Orphans ETF — which has since filed for liquidation.
Many of the products, namely the Strive funds, fall into the voters category.
During the current proxy season, Strive’s funds voted against the 11 most significant ESG resolutions at S&P 100 companies, according to Morningstar, in contrast with votes in favor of those proposals by impact-focused firm Engine No. 1.
Editor's note: This story was updated to reflect an update of Morningstar's report, which initially did not include the Strive Emerging Markets Ex-China ETF.
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