The market’s most political stocks had a bad year. In 2023 they will come back

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After months of headlines about “capitalism awakening” and huge stock market declines, one could apologize if one thinks that socially conscious investing has been on the run, pursued by the hostility of politicians who believe focusing on corporate governance and environmental impact means ‘burn retirees’ money to advance an agenda other than investment profitability.

But you would be wrong.

In fact, so-called sustainable funds, also known as ESG (environmental, social and governance) funds, were still seeing net inflows from investors through late November, the most recent month for which full data are available, and are likely to end the year little or flat falling, according to data compiled for CNBC by Morningstar. The three months to December were all negative inflows and most of the money came in the first half of the year, but sustainable fund assets grew 0.84% ​​through November, better than the 1.1% decline, despite the market crisis for all funds, according to Morningstar.

The market’s struggles in December are likely to erase that small spike in net inflows by year-end, but the absence of mass panic from ESG funds belies the negative narrative that has emerged around ESG investing, said Associate Director Alyssa Stankiewicz of Sustainable found on Morningstar research. “Anti-ESG has attracted a lot of attention and isn’t necessarily reflected in the data,” Stankiewicz said. “ESG hasn’t had such a bad year at all.”

Net cash inflows in 2022

Month ESG Fund Flows ($B) All Cash Flows ($B)
2022-01 3.344.004.059 8.082.218.819
2022-02 2,787,079,780 48.382.704.586
2022-03 3,822,291,292 30.217.917.333
2022-04 1.260.561.808 -93.741.946.720
2022-05 -3.308.599.001 -41.709.431.331
2022-06 379.764.023 -64.284.718.723
2022-07 -18,096,791 -14,722,833,775
2022-08 953.818.579 3.220.188.916
2022-09 -659.133.391 -76.876.988.291
2022-10 -3.670.207.057 -29.987.131.270
2022-11 -2,054,672,735 -52.588.338.693
Annually until November 2,836,810,566 -284.008.359.149
growth rate 0.80% -1.01%

Source: morning star

The performance of ESG funds has been more important to investors than cash flows, it has not been good but does not deviate significantly from a difficult year for the market. Analysts who follow the industry say the biggest drag on the performance of ESG funds has been the fact that many sustainable or ESG funds are avoiding companies that produce fossil fuels. Energy, dominated by traditional players like ExxonMobil Spirit raftersis the only one of 11 sectors in the Standard & Poor’s 500 stock index to rise this year.

The average large-cap equity ESG fund had lost almost 20% in 2022 by December. 21, according to Morningstar. That’s about 2.4 percentage points worse than the decline in S&P 500 Index, including dividends. S&P Dow Jones Indexes say so S&P 500 ESG Index is down 18.5%, including dividends.

“Depending on how you break it down, ESG has done well,” said David Nadig, exchange-traded fund expert and financial futurist at VettaFi, a financial advisor research firm. Within ESG, some clean energy ETFs have had much smaller losses than the broader market, with which iShares Global Clean Energy ETF about 5% down. “It’s not that ESG doesn’t work. It’s a declining market,” Nadig said.

Energy will continue to play a major role in ESG in 2023

Whether the lag in ESG performance continues will be critically dependent on whether oil continues to outperform, as the lack of oil from most ESG funds will weigh on 2022 results. Morningstar’s energy strategist Stephen Ellis thinks that’s unlikely because “we view stocks as being fairly valued to expensive,” particularly in the oil portion of the petroleum business. Meanwhile, Maurice Fitzmaurice, portfolio manager at Fidelity Investments, wrote on January 12 that oil and gas demand should continue to rise as the impact of the Covid pandemic has passed, while lost supplies from Russia push oil prices higher.

Funds that do not use ESG have shown mixed performance, with energy making the big difference. That Limited Capital Orphan ETF, which focuses on ESG-unpopular fossil fuel, weapons, gambling, tobacco, alcohol and nuclear companies, is up 6% for the year. But the BAD ETF — which stocks gambling and alcohol alongside pharmaceuticals, without large oil and gas holdings — is down 18%.

ESG fund flows in Europe have held up much better than in the US, thanks to more ESG-friendly regulations, according to Morningstar’s Stankiewicz.

Top House Republican on the purpose of ESG

US regulation is moving in a pro-ESG direction at the federal level, but not going as far as Brussels, Stankiewicz said. A new Labor Department rule announced last month reverses a Trump administration policy and allows administrators of 401(k) plans to consider ESG factors along with shorter-term financial considerations when selecting investment options for members.

Also, the Securities and Exchange Commission is considering a rule that would require public companies to make detailed disclosures about their climate impacts, including their own carbon emissions, emissions from utilities that sell heat and power to companies, and emissions from customers who buy a company’s products use .

But there has also been increased scrutiny of “greenwashing” in the fund industry by the SEC, with its new Climate and ESG Task Force within the Division of Enforcement investigating ESG-related misconduct.

All of the attention, positive and negative, should keep ESG investing in investors’ minds, even if it’s still a tiny fraction of the overall market, Nadig said. Its greater impact will come as the SEC rule allows investors to make more accurate comparisons of companies’ strategies to control their own exposure to climate risk and other governance issues that may impact financial performance, he said.

“Even if you’re not an ESG investor now, you’re moving into a world where every company and portfolio has an ESG score, just like a price-to-earnings ratio,” Nadig said. “It’s another metric that you may or may not use.”

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