Sustainable Investing: No Longer Sustainable?

Not too long ago, investors were pouring money into sustainable funds at a rate of more than $10 billion per quarter. Now they are pulling that much money out of them.

In an exodus with sweeping ramifications inside and outside Wall Street, investors retreated from sustainable funds—which commit money to environmental, social, and governance issues—at a record clip in the first quarter. In all, US investors withdrew nearly $9 billion from sustainable funds during the first three months of this year, the biggest quarterly decline in the sector’s history. Should withdrawals continue at the same rate, says

Kate Shattuck, global co-leader of the Impact Investing practice at Korn Ferry, the market shift could sharply diminish the ability of sustainable funds to influence corporate actions.

The more money investors pull out, explains Shattuck, the less sustainable funds have available to invest. The less they have to invest, the less power they have to push ESG initiatives, which could cause organizations to slow them down or abandon them. “It’s a domino effect,” says Shattuck. To be sure, companies have already laid off staff and slashed or paused certain ESG-related commitments and budgets to help weather economic volatility.

It’s also quite a reversal from just a few years ago. US-based sustainable funds reached their apex in 2020, when assets under management grew to $35 trillion. The following year, in 2021, investors poured $10 billion or more into sustainable funds every quarter. Starting in 2022, however, investors began a slow but steady retreat that some experts attribute to the politicization of ESG. “Investors and firms are concerned about labeling funds as ESG because they don’t want to be sued or attract negative attention,” says Shattuck, noting the recent lawsuits, consumer boycotts, and news headlines critical of corporate ESG initiatives, particularly those around diversity, equity, and inclusion.

Another factor pushing investors away from sustainable funds is potential changes to the regulatory environment after the US presidential elections in November, says Shelly Fust, global co-lead of ESG and sustainability at Korn Ferry. Noting the tight polling and drastically different positions of the two candidates, Fust says investors are playing it safe and pulling out their money rather than risk “significant repercussions” from changes to policies in areas like renewable energy and decarbonization.

Sharon Egilinsky, a partner in the ESG and Sustainability Solutions practice at Korn Ferry, says it’s important to distinguish between ESG as an investment class, on the one hand, and as a guiding principle for business operations, on the other. She says investors’ pullback could end up helping funds and companies refine and define their approach to the individual components of ESG, as opposed to lumping everything into one asset class. “Funds need to pivot how they go to market,” says Egilinsky, noting that it’s difficult for investors to gauge how much of a fund’s performance is due to ESG factors and how much to other, unrelated business metrics. Shattuck agrees, envisioning more funds targeting things like clean energy, net-zero emissions, and other niche areas.

On the company side, experts see the decline in ESG commitments as a function of the economic environment rather than as a change in purpose or philosophy. On a global basis, ESG-focused investing remains strong, particularly in Europe. And younger consumers, including those in the US, still want goods to be produced sustainably and companies to operate ethically. Alma Derricks, a senior client partner in the Culture, Change, and Communications practice at Korn Ferry, isn’t as fatalistic as others about ESG investing in the US. “Momentum comes in waves,” she says.

Learn more about Korn Ferry’s ESG and Sustainability capabilities.

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