The anti-ESG sentiment in the US has led to the launch of funds looking to attract like-minded investors, but the appetite seems limited.
- Morningstar identified 26 funds that could be considered anti-ESG, either by marketing themselves as such or investing against ESG principles.
- Assets in such funds reached $2 billion at the end of March as the trend took off in late 2022.
- Because ESG is an investment lens rather than a political position, these portfolios are exposing themselves to long-term risks.
The US has seen the emergence of new funds looking to attract investors who are on the ‘anti-ESG’ side in the ongoing debate. To learn more about why ESG has been politicised, read our explainer. Morningstar analysed 26 funds in its Direct database that could be considered anti-ESG, either by marketing themselves as such or investing against ESG principles.
The types of anti-ESG investing
Assets in anti-ESG funds reached $2 billion at the end of March, seven times the total of one year before. The trend took off in late 2022, but the sentiment can be traced back to the early 2000s.
Analysts grouped them into five mutually exclusive categories. Firstly, anti-ESG funds use ESG data to build portfolios by tilting toward companies that management believes are unduly penalised by ESG ratings providers. Secondly, political funds commonly refer to ESG investing as part of a ‘woke, liberal agenda’. These funds invest in companies believed to be supportive of conservative-valuesaligned policies.
Thirdly, renouncer funds previously claimed to adhere to ESG investing principles but subsequently removed references to ESG principles from fund names and documents for fear of being associated with the ESG movement. Then, vice funds invest in companies traditionally excluded by socially responsible or ethical funds. These include ‘sin stocks’, which tend to be concentrated in alcohol, tobacco, weapons, and gambling. Finally, voter funds are traditional passive funds with voting policies in opposition to ESG principles.
Flows peaked in 2022
Boosted by product development, flows into anti-ESG funds peaked at $376 million during the third quarter of 2022, more than five times the previous record seen in the first quarter of 2021. More than 80% of that was collected by Strive’s first fund – Strive US Energy ETF – which attracted nearly $100 million in its first week and more than $300 million in its first month.
The investor looked poised to continue this momentum when it launched six more funds over the following three months, but what started as a downpour slowed to a drizzle, according to Morningstar. The second fund – Strive 500 ETF STRV – picked up $33 million in its first month on the market, and the following five funds attracted less than $2 million on average in each month since launch.
Overall demand for such funds has been muted. From 2017’s final quarter through the first half of 2022, anti-ESG funds lost an average of $1.2 million each quarter while, during the same period, US equity funds attracted roughly $980 million each quarter.
Funds in the Vice category were the worst affected, losing nearly $4 million each quarter, while Political funds picked up roughly $2.6 million each quarter. Strive’s marketing may have had knock-on effects for other anti-ESG funds: Renouncers and Political funds attracted $71 million and $49 million, respectively, over the past three quarters combined.
Anti-ESG fund Constrained Capital ESG Orphans ETF struggled to gain traction: after launching in May 2022, it picked up $870,000 on average in each quarter since. It filed to liquidate in June 2023 before the end of the month.
Disproportionate exposure to risk, surprising impact
Morningstar found that these funds tend to have higher levels of ESG risk than peers, but some also have strong exposure to positive environmental impact. They vote against pro-ESG shareholder resolutions and have above-average exposure to controversial industries, such as controversial weapons and fossil fuels.
In contrast to conventional weapons, controversial weapons have a disproportionate and indiscriminate impact on civilian populations. Some controversial weapons are illegal, as their production and use are prohibited by international treaties and bans.
Fossil fuels involvement was defined as thermal coal, oil and gas, oil sands, shale energy, deep-water production, and Arctic offshore exploration. For example, ExxonMobil NYSE: XOM) accounts for nearly one-fourth of Strive US Energy ETF’s portfolio, but is strongly exposed to ESG risk because of the likelihood of oil spills across its broad network of pipelines and refineries.
Moreover, its position as one of the world’s largest manufacturers of petrochemicals exposes the company to significant legal and financial risks. For instance, the company was fined $14 million for air pollution violations at its Baytown Complex in Texas in 2017.
Despite the active stance against ESG, some of these funds came with a positively surprising impact. For example, three of Strive’s funds have a major position in Nvidia, which contributes heavily to climate tech.
Renouncer funds, instead, aligned with a resource security investment theme, which includes efficient use of resources and circular economies on materials such as water and timber. Inspire Faithward Mid Cap Momentum ETF and Inspire International ETF both have close to 32% of their portfolios involved in this theme and both hold Carlisle Companies (NYSE:CSL), a manufacturer and seller of rubber and plastic engineered products, which has 80% of its revenue aligned with green building supporting activities.
Despite these – perhaps unintended – achievements, it is important to remember that ESG is not a political stance, but an investment lens used to assess long-term risks. As such, it appears that these portfolios are willingly exposing themselves to potential losses by basing business decisions on political ideologies. While the debate in the US is showing no sign of abating, the need to effectively manage risk is likely to win out over the long run.