FINANCE  |  INVESTING

Wall Street’s ESG Craze Is Fading

Investors pulled more than $14 billion from sustainable funds this year

By Shane Shifflett 

Nov. 19, 2023 5:30 am ET

Wall Street rushed to embrace sustainable investing just a few years ago. Now it is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions.

The about-face comes after tightened regulatory oversight, higher interest rates that have slammed clean-energy stocks and a backlash that has made environmental, social and corporate-governance investing a political target.

“This really is the result of too many managers looking to cash in on increased awareness and demand for ESG investments,” said Tony Turisch, senior vice president at Calamos Investments. 

The third quarter was the first time more sustainable funds liquidated or removed ESG criteria from their investment practices than were added, according to Morningstar. That is a reversal from not that long ago, when companies were rebranding faltering funds to cash in on the billions of dollars flowing into sustainable investment products. 

In 2021, Hartford Funds inserted “sustainable” into the name of its core bond product and subsequently saw investors pour $100 million into it. But after missing its own performance targets last year, Hartford is switching gears again. 

Later this month, the bond fund will be known as the Core Fixed Income Fund and potentially sell some of the holdings that made it sustainable when it pivots to a conventional investment strategy, according to company filings. Hartford declined to comment on why it is rebranding the fund.

At least five other funds also announced they would drop their ESG mandates this year, while another 32 sustainable funds will close, according to data compiled by Morningstar and The Wall Street Journal.

The retreat comes after investors withdrew more than $14 billion from sustainable funds this year, leaving them with $299 billion, according to Morningstar. Conventional funds also lost money, but the pain was more acute for climate and other thematic products hit by high interest rates and other factors.

Ron Rice, vice president of marketing at Pacific Financial, said a legal fight over the Labor Department’s rule letting retirement-fund managers consider ESG factors may have weighed on the popularity of his firm’s sustainable products.

“We found that the demand for ESG investing, by financial professionals working with retirement-plan participants, was more limited than we anticipated,” he said. Earlier this year, Pacific Financial removed sustainability from the name of three mutual funds then holding more than $187 million. All three funds subsequently saw their assets under management jump, Rice said.

Political pressure could be factoring into the changes as well. Republican presidential candidate Vivek Ramaswamy has been a vocal ESG critic. Last year, Florida said it was pulling $2 billion of its assets managed by BlackRock in part due to the company’s support of ESG. 

Meanwhile, the Securities and Exchange Commission is stepping up oversight of the space and recently adopted a rule to prevent misleading naming conventions. Funds have roughly two to three years to comply, depending on their size.

Already, the SEC is policing the space more closely. In September, Deutsche Bank’s investment arm, DWS Investment Management Americas, agreed to pay $19 million to settle an investigation into alleged greenwashing by the firm for overstating how the company factored ESG data into investment decisions.

At the end of the month, DWS will liquidate a mutual fund the company rebranded as ESG in 2019.

DWS said it addressed the matters with the SEC and that it decided to liquidate the fund due to its small size. 

Despite the closures, new ESG funds continue to pop up. Last year, Naperville, Ill.-based Calamos Investments said it would close a $4 million sustainable equities fund that had lagged behind its benchmark from inception, according to company filings.

Then earlier this year, the firm came up with two new ESG funds. They have the same strategy as the closed fund, but brandish NBA superstar Giannis Antetokounmpo’s name. 

“While it’s not working currently, we expect that over the long term it will add value to the strategy,” said Turisch of Calamos.

Write to Shane Shifflett at shane.shifflett@dowjones.com