UK investors have pulled nearly £2billion out of ESG equity funds in the last four months in a ‘remarkable reversal’ of demand for so-called ‘woke’ stock-picking.
Figures from funds network Calastone showed withdrawals gathered pace over the summer in what was described as an end to the boom that started in 2019.
It will be seen as a blow to so-called ‘woke capitalism’, which has been criticised for prioritising lofty social goals over the bread-and-butter work of delivering services and goods to customers and making money for investors.
One City analyst said the higher-interest-rate environment meant that ‘virtue signalling’ investments were now looking less attractive.
Calastone’s figures showed investors sold down a net £304million of ESG – environmental, social and governance – funds in May, £369million in June and £330million in July before snowballing to £953million last month, taking the total to £1.96billion.
Exodus: Figures show withdrawals from ESG funds gathered pace over the summer in what has been seen as an end to the boom that started in 2019
Before this year, there had been only one month of outflows since the ESG boom began in 2019, the report said. Environmental, social and governance funds have gained popularity in recent years, screening investments based on their corporate policies.
They tend to shun oil and gas firms and defence companies – but that means they have missed out on booms in those sectors over the past couple of years.
ESG investing – now a multi-trillion dollar global industry – has also been caught up in wider scepticism about so-called ‘woke’ culture, especially in the US.
Questions have been raised about how companies’ ESG standards can be measured and the way in which funds have sometimes seemed to rely on the success of US tech firms – which score well because of their low carbon footprints and diversity policies.
ESG concerns also appear to matter less to UK investors than others. A survey by online trading provider IG recently found just 28 per cent said such considerations were important to them, compared with 42 per cent of Australian and 40 per cent of Japanese investors.
Edward Glyn, head of global markets at Calastone, said the recent exodus of funds reflected a ‘double whammy’, with higher interest rates making equity investments less attractive and UK assets in particular suffering from a sell-off.
‘The move out of ESG funds has gathered pace in a remarkable reversal after the boom in recent years,’ he said. ‘Four months of outflows signals a new trend emerging that fund houses will have to work hard to counteract.’
The figures tell a different story from separate data published by Bank of America on ESG bond funds, which it found surged by £33billion in July globally, continuing a recovery seen over the previous months after a slump in March and April.
Neil Wilson, chief market analyst at Markets.com, said: ‘I don’t think it’s over for ESG, it’s just becoming more honest and more competitive – you can’t just wrap a ton of woke tech stocks into your ESG fund to ride the tech boom like we had seen.
‘The easy money has been made and now it’s going to have to be more considered and more transparent, and probably with more rigour, which is probably going to mean it’s less attractive on a relative basis.
‘The pendulum has swung from “we must be in ESG” to something more considered, and that means more brass-tacks type decision making.’ Figures on the total value of funds invested in ESG vary because of the different ways in which it can be categorised.
Data analysed by Calastone in 2020 showed there were 373 funds in the UK – including equity, as well as other assets – that market themselves under labels which would fit the category.
These represented £39.5billion in assets under management or just over 3pc of the total UK funds market.
More recent figures show 2021 was the biggest year for ESG equity funds, with £11.2billion of inflows, falling to £6.7billion last year.
Research by data provider Bloomberg Intelligence last year suggested that global ESG assets may hit £40 trillion, or a third of assets under management globally, by 2025.
But that was before the rapid series of interest rate hikes by global central banks that has transformed the investment picture over the past year and a half.
Michael Hewson, chief market analyst at CMC Markets, said: ‘As with everything, it’s all about returns – ESG funds or otherwise – and higher rates have reduced the attractiveness of what I would call virtue signalling investing.
‘The question needs to be posed whether ESG has fallen out of favour due to scepticism over the entire concept, or whether it is a wider problem brought about by higher rates, prompting outflows.
‘One thing I would say is that there does need to be a lot more pragmatism about how ESG guidelines are interpreted.
‘When companies like BAE Systems, Shell and BP find themselves shunned due to not conforming to what investors perceive as ethical investing you have a bit of a problem.
‘Rather than sticking labels on whether companies conform to ESG guidelines investors might be better served in dealing with the world as it is, and not how they would like it to be.’
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