GREEN FINANCE: Investors pull £8bn out of woke ESG funds amid greenwashing backlash

Global investors pulled £8billion from woke ESG funds last year amid a backlash over greenwashing and the ‘vague’ promises they offer.

Figures from industry group Calastone show the three-year boom in the funds focused on environmental, social and governance issues was now over.

From 2020 to 2022, £40billion was ploughed into ESG in what proved to be a boon for active fund managers, Calastone said.

That was ‘astonishingly’ six times the investment committed to funds that did not have specific ESG commitments.

But last year billions were pulled out by investors, including £2.9billion in Europe where the reversal was seen first – and £940million in the UK. It has now spread, Calastone said.

The rise reflected demand to invest ethically by backing companies that cut carbon emissions or tackle discrimination in the workplace.

Typically, ESG investors might be expected to shun major oil firms or arms manufacturers.

But it has fallen victim to political divisions, particularly in the US. And the trend has also been subject to claims of ‘greenwashing’ – the idea that some firms flaunt environmental credentials, exaggerating their effect.

Larry Fink, boss of asset management giant Blackrock, was once at the forefront of the movement but said last year that he had stopped using the term. Calastone said the change last year had been ‘startling’.

The report added: ‘The great ESG backlash reflects accusations of greenwashing and an increasing concern that ESG is simply too vague to meet investor concerns.’

For example, a car maker that has improved governance standards might qualify to be part of an ESG fund even though a typical investor might not expect it to do so.

‘Whether it’s because people don’t really believe companies are walking the ESG walk, or are losing faith in the fund management industry’s ability to effectively differentiate between companies that meet the highest standards and those that do not, there has been a clear break in the trend,’ Calastone said.

‘2023 is the first year since at least 2019 that non-ESG equity funds have attracted more capital than ESG.’

Overall, investors pulled £5.6billion from equity funds last year and were ‘especially negative’ from May onwards, Calastone said.