Why Anti-ESG Funds Aren’t Winning Over Investors

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by Eric Burdon
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The loudest critic of ESG right now is in the United States. Even though most individuals in the US don’t know or know little about ESG, right-wing senators, governors, attorney generals, and others wielding political power are working to squash the movement. Between some banning ESG and others encouraging divestment from any company investing in or offering anything ESG, the movement rallies around an “anti-woke” investing philosophy.

And similar to how some individuals created “conservative social media platforms” like Parler and Truth Social, this “anti-woke” ideology has brought forth the rise of anti-ESG funds that people can invest in.

On the surface, this feels problematic, but similar to Parler and Truth Social, anti-ESG funds are underperforming. But what’s so interesting is that these funds are so bad that they’re failing well before they have a chance to get going. Why they are failing can amount to a handful of key factors.

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What Is Anti-ESG?

As Morningstar points out in their anti-ESG analysis, it’s easy to distinguish five specific groups that anti-ESG comprises. However, each anti-ESG fund doesn’t exactly fit into one of those five categories. The lines between each category are pretty blurry at the moment.

But beyond that, anti-ESG faces the same sort of problem that ESG faces right now: a concrete definition. For sure, there are solid examples that we can point to that are ESG, notably ones revolving around ethics and sustainability. But when it comes to anti-ESG, it’s difficult to determine what makes a fund anti-ESG.

An anti-ESG fund could cover your standard index fund after all since these funds do invest in fossil fuel companies, for example. Beyond that, a fund that is truly anti-ESG tends to be something niche, like selling “sin stocks,” which are focused on alcohol, tobacco, weapons, and gambling.

That, or they are something entirely different.

Nevertheless, there is mixed messaging about these funds, and the only distinguishing factor stems from a slightly different investing philosophy from the standard index funds. Making a fund “anti-ESG” isn’t as impactful as an ESG-centric fund when it comes to investing philosophies. ESG is strictly different and offers a new angle on corporate responsibility, among other things, while anti-ESG can be clumped into your standard index funds.

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There Are Real Financial Costs To Going Anti-ESG

Day after day, there are reports and studies that show how divesting from existing pensions and retirement plans could cost investors millions, if not billions, of dollars. When Indiana put an anti-ESG bill, financial experts predicted that, should the bill pass, the fund could suffer $6.7 billion in losses over the next 10 years. The true people who would shoulder those losses would be state employees and retirees living in that state.

This has nothing to do with political ideology but rather with where the world is heading. Already, the US is feeling a bit of that in the form of its treasuries not being bought by foreign countries. As ESG standards are adopted across other countries on a larger scale, other countries that are slow to adopt ESG standards will lag behind, and their economies could suffer as a result.

On a smaller scale, the funds experiencing those losses are more natural as green energy ramps up and other financial institutions take ESG more seriously.

Even though ESG funds have underperformed in the past few years, there is a much better chance of them rebounding as certain issues get resolved. Furthermore, over the past five years, ESG funds have outperformed non-ESG funds.

In the end, even if a fund is ESG, an asset manager could theoretically work around that part of it by arguing that these funds make more money for investors, making them more viable regardless of whether a customer believes in sustainability or not.

They’re Still Too Young

But while ESG funds are drooping slightly, it’s important to note that ESG has a long history and there have been financial vehicles for ESG for decades now. This is compared to anti-ESG which is something that’s only been established recently. Being young and with key influential advocates in positions of power pushing anti-ESG, we’ve been seeing anti-ESG funds outperforming ESG funds in recent months.

This isn’t much of a reason to abandon ESG funds, as investing overall is a long-term game. There are peaks and valleys, and as mentioned before, ESG funds have been on the rise for several years now. And when it comes to anti-ESG, even that movement is under fire for mixing politics into investing, even when one particular firm markets itself as never mixing politics with investing.

Anti-ESG Will Serve As A Roadblock

As the movement gains more momentum, there is going to be pushback. But at the rate that ESG is being adopted, the resistance we are seeing now is more of a roadblock. Whether people hate ESG or support it, there is no denying that investing in companies that make ESG a priority will see more growth over time.

Maybe not this year, but perhaps the next. And those lagging behind will unfortunately be left behind.

Follow ESG Investor news here, and keep track of company ESG performance via ESG ratings here.


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