Anti-ESG funds fail to gain traction in the US

Funds designed as alternatives to environmental, social and governance funds are losing sales momentum rapidly, raising questions about the category’s long-term viability.

A report from Morningstar focusing on the US market shows the funds’ sales peaked in the third quarter of 2022, at $377mn but have since plunged, hitting $183mn in this year’s first quarter. This comes despite overall assets rising more than seven-fold in the year to March, to $2.1bn.

“Although there’s been a lot of talk about anti-ESG funds, it’s not clear that they have staying power,” the report’s authors, Alyssa Stankiewicz and Mahi Roy, wrote.

Morningstar’s study categorises the profusion of anti-ESG funds into five subclasses: “anti-ESG,” which invest in companies considered to have been penalised by ESG policies; “political” funds, which invest in companies said to support conservative values; “renouncers,” which formerly claimed to embrace ESG, only to shed the acronym for fear of being associated with it; “vice” funds, investing in “sin stocks,” such as those related to alcohol, tobacco and weapons; and “voter” funds, passive vehicles pledged to vote proxies against ESG measures.

Strive Asset Management, whose funds Morningstar assigns to the “voter” subclass, was largely responsible for last year’s burst of enthusiasm.

Its first fund, the US Energy ETF, received a near-$100mn influx in its first week of trading during 2022’s third quarter.

Subsequent rollouts, however, drew far fewer sales. The firm’s second fund attracted $33mn in its first month, and the next six have garnered under $5mn on average in each month since launching. Its Emerging Markets Ex-China ETF did draw in $103mn at inception in January, but sales decelerated afterwards.

In what may be an omen for the investing theme, the sole fund in Morningstar’s “anti-ESG” subclass, the Constrained Capital ESG Orphans ETF, recently filed for liquidation. It has just $3.4mn in assets.

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