Anti-ESG funds take off, but soon stumble

Amid an ideological backlash against ESG investing in the U.S., “anti-woke” investing took off in the third quarter of 2022, according to a new report from Morningstar — but its momentum quickly fizzled.

Assets under management in funds that are positioned as alternatives to ESG funds reached $2 billion (all numbers in U.S. dollars) by the end of the first quarter this year, up sharply from under $250 million as of mid-2022, it reported.

Flows into funds that self identify as anti-ESG peaked at $376 million in the third quarter last year.

Most of the growth came through new product launches and strategy changes. Morningstar reported that almost 20 funds began touting anti-ESG strategies in 2022, including 10 of those in the third quarter.

However, since then, flows have dried up, it said, noting that “Anti-ESG funds have yet to gain traction with investors.”

The report defines a variety of strategies as anti-ESG based on the contents of their prospectuses and marketing materials, such as funds that focus on so-called “sin stocks,” funds with anti-ESG proxy voting policies, and funds that focus on companies with conservative political leanings.

“These strategies come in different flavors but have in common their aim — providing an alternative to ESG investing,” it said, noting that the landscape includes just 26 funds at this point.

These funds “exhibit above-average exposure to controversial industries, such as controversial weapons and fossil fuels, and vote against pro-ESG shareholder resolutions,” it noted.

The bulk of the Q3 flows last year went into the inaugural fund from Strive Asset Management, which accounted for 80% of flows into the anti-ESG category in the quarter.

However, as the company launched more funds, its momentum quickly fizzled, the report noted.

“What started as a downpour slowed to a drizzle,” it said.

And, apart from that brief period of strong inflows, “demand for anti-ESG funds has been muted,” it said — noting that anti-ESG funds lost an average of $1.2 million in assets each quarter from the end of 2017 through mid-2022 — at a time when U.S. equity funds overall “attracted roughly $980 million each quarter,” it noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.