'The boom is over', strategist blames lack of ESG structure
More issuers are closing down ETF funds as investor interest in environmental, social, and governance (ESG) criteria wanes.
According to information provided by Bloomberg Intelligence, 58 sustainable exchange-traded funds were introduced globally in the first quarter of 2023, down from 101 in the corresponding period of the previous year. The median charge for holding these funds is gradually rising to 0.35%, making it more pricey.
This is a stark turnaround of a strategy that gained popularity as investors attempted to diversify their portfolios by including businesses that are leading the transition away from carbon or that promote diversity in the C-suite. Do-good investment has been rendered obsolete by the severe market conditions of 2022, as investors have abandoned a variety of ESG products in favour of more lucrative and affordable funds.
“The ESG boom is over and that’s because there’s no defined criteria or structure to what constitutes ESG, as well as the fact that you tend to pay up in fees for an ESG product yet get largely the same results as a typical US equity index,” said Todd Sohn, an ETF strategist at Strategas Securities.
High expense ratios, political opposition, and concerns about a recession are all putting pressure on ESG funds. Many investors are being wary owing to concerns that the US may be entering a recession.
Compared to 13 in 2022, a minimum of eight ETFs have already been liquidated this year. ETFs in the US are failing at a pace that is about double that of last year - a part of a wider retreat.
A 40% focus on clean energy and low carbon emissions is among the new ESG funds that are still being introduced. Global fund assets are increasing in proportion to climate ETFs, but investors must be aware of the risks associated with liquidation and the potential for cannibalization of social and governance investing alternatives. However, volatile markets have increased issuers' awareness of funds that don't satisfy demand.
“I think both investors and ETF sponsors have a more informed and mature concept of ESG today as opposed to a few years ago when many of these products launched,” said Jane Edmondson, co-founder of EQM Indexes. “While there were many excellent, thoughtful ESG ETF product implementations, many others were bandwagon products hoping to capitalize on investor appetite for ESG.”
