One could be forgiven for thinking the ESG revolution has ended. Over just a few years, funds bearing those three letters — standing for "environmental, social and governance" priorities — enjoyed a meteoric rise and then, just as quickly, appeared to crash and burn.
The counterrevolution didn't take long. Just six years ago, BlackRock CEO Larry Fink wrote what became ESG's manifesto, a highly influential letter to other CEOs that extolled the importance of socially conscious investing.
"Society is demanding that companies, both public and private, serve a social purpose," Fink
Investment flooded into ESG funds, which promised to funnel the cash only into corporations that benefited — or at least didn't harm — the planet and humanity. In 2021, U.S. investors poured $69.8 billion into ESG-focused ETFs — an all-time record for the category, according to Morningstar Direct.
Then the tides turned. Prominent Republican politicians began
"Through this legislation, Florida will continue to lead the nation against big banks and corporate activists who've colluded to inject woke ideology into the global marketplace, regardless of the financial interests of beneficiaries," DeSantis said at the time.
The political backlash was soon followed by a financial one. In 2021, global inflows into ESG funds had reached $649.2 billion. By 2023, they were down to $62.3 billion. And in the United States, the cash actually reversed course — from the nearly $70 billion inflow of 2021 to a $13.2 billion outflow in 2023. According to Morningstar, this was the worst calendar year in ESG's history.
What happened? Some of the category's proponents view the downturn philosophically: Given how popular ESG was for a few years, perhaps some blowback was inevitable.
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"When a type of investing becomes popular all of a sudden, starts to take market share and starts to really change things, the knives come out," said Sam Adams, CEO of
But Adams doesn't believe the battle is over — and neither do many of ESG's champions. In fact, leaders of sustainable investment firms across the country make a strong case that ESG has already secured a place in the future of investing, and that the reports of its death are greatly exaggerated.
"It will 100% survive, and it will thrive," Adams said.
Understanding the numbers
At first glance, the outflows from ESG funds last year look disastrous. But ESG's advocates point out that most of them came from one fund: BlackRock's iShares ESG Aware MSCI USA ETF (ESGU). In 2023, this single ETF suffered a withdrawal of
"You can almost erase all of the negative outflows to ESG with just that one BlackRock fund," Adams said.
And why did ESGU suffer such outflows? Not because investors pulled out their cash, but because BlackRock transferred the contents of one of its model portfolios to another. In other words, one of BlackRock's own products divested from the fund.
"It wasn't necessarily that outside investors were pulling out of ESG. BlackRock did an internal reallocation," said Peter Krull, director of sustainable investing at
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Of course, that still leaves about $4 billion in outflows to account for. But that loss is more understandable in the wider context: In 2023, following the stock market's worst year since 2008, ESG products were far from the only equity funds to lose investors. U.S. mutual funds, for example, suffered withdrawals of $512 billion, according to Morningstar.
"ESG was slightly negative, but not nearly as much as the conventional stuff," Adams said. "So it's true that less people are putting as much money into ESG now, but they're putting a lot less money into regular equities in general."
Ignoring the noise
Aside from the numbers, there's the politics. For the past few years, Republicans have waged war on ESG, decrying it as a way for liberals to force their "woke" ideology on others. In 2021, Florida Senator Marco Rubio introduced an anti-ESG bill in Congress called the "
Sustainable investing leaders take a dim view of this crusade.
"The backlash has been sort of comical to watch, because most of the people who talk about it don't really know what they're talking about," Krull said.
The main thing these politicians miss, experts say, is that ESG is not inherently liberal or conservative; it's a set of criteria measuring a company's impact on the environment and society. And that information relates to not just the future of the planet, but the future of the company.
"It's not really 'woke investing,'" Krull said. "It's just enhanced due diligence investing."
Adams echoed this point, using the example of real estate. A developer that ignores climate change, for instance, might be oblivious to future risks of flooding or heat stress to a certain property. For a potential investor, that's important information.
"ESG will be used by all kinds of investors," Adams said. "There'll be conventional investors who are not even thinking about sustainability — who are just thinking about financial sustainability — who say, 'I don't want to hold those guys because they're not paying attention to the sea-level rise, and Miami is starting to sink.'"
Kristin Hull, founder of the impact investing firm
"Whether the U.S. is ready to admit it or not, we really are transitioning to the next economy, which will be led by renewables," Hull said. "So moving ahead of the game is a way to strengthen and de-risk a portfolio."
So why has there been such a fierce backlash to this de-risking? Hull believes it has a lot to do with the fuels being replaced by those renewables. The Texas school board's complaint, for example, was that BlackRock was "boycotting" the state's oil and gas industry (something BlackRock has denied).
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"I think that there's a certain sector of our economy — they're loud, they're highly invested in fossil fuels and they don't like the transition," Hull said. "The incumbent economy, the fossil fuel economy, has worked for a few, and they want to hold on to that."
But that doesn't mean all criticisms of ESG are invalid. There are real problems with the movement, Adams said, including "greenwashing" — the slapping of an "ESG" label on funds that still invest in environmentally harmful companies — and other issues.
"There are legitimate criticisms of ESG," Adams said. "The data is not at the quality of financial data, so you need to be careful with it. No. 2 … ESG ratings are not data. They are opinions, and they're not a great way to build strategies. So that needs to be addressed."
These problems can and should be solved, he said, and more attention to them can only help ESG get better. The challenge for sustainable investors is to separate the truth from the noise.
"The one that got all the attention in the press was the woke, progressive political stuff, which is backward," Adams said. "That's the least important, least valid criticism. The other ones are more important and need to get more airtime."
Looking to the future
Can ESG survive? Will it live on after the culture wars have moved on to another target?
One way to answer that question is to look at demand. In October 2023 — a couple of years into the backlash — a
Demand did not appear to be flagging. Eighty-four percent of U.S. investors were still interested in sustainable investing, and the rates for younger investors were even higher — 96% of millennials and 85% of Generation Z.
How did interest in ESG remain so high, in spite of years of attacks? One possibility is that the politicians opposing it were preaching to the choir.
"The people who are going to invest with their values are going to invest it with their values no matter what some politician says," Krull said. "And those politicians and the people who tend to follow what they say weren't going to invest sustainably anyway. So the way I look at it is, there's really been no impact."
Not only that, but millennials and Gen Z are poised to be the main beneficiaries of the "great wealth transfer" — the inheriting of a projected
"One of the reasons ESG will stick around is that investors want it," Adams said. "As more and more younger people become the owners of capital, they have an expectation that sustainability is something that they can get."
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So where does ESG go from here? The demand is still high, and the political damage is minimal, but the name has lost some of its luster. One solution could be to simply change the name.
"I think that the terminology is going to continue to evolve," Krull said. "So we're seeing less of that phrase 'ESG' advertised because they've made it a dirty word."
Hull, for one, says she wouldn't miss the three initials.
"I was an impact investor before the letters E, S and G were invented," she said. "So I'm not actually attached to what we call it. I would say that what's most important is … being conscious and aware of what our dollars are invested in, because we get the economy that we invest into."
Whatever it ends up being called, Hull, Krull and Adams all believe ESG has forged a permanent role in investing — not because it's won a political battle, but because it's useful to investors. It may take a lower profile in the future, but in some ways, that may be a mark of how far it's come.
"I see it becoming just part of the toolkit," Krull said. "It's becoming less of a novelty and more just something we all do."
