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.

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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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