BlackRock, State Street among money managers closing ESG funds

BlackRock and other money managers spent years rolling out sustainable funds, seeking to capitalize on surging interest in ESG investing. Now they're abandoning an increasing number of those products in the U.S. amid political backlash and investor scrutiny.

State Street, Columbia Threadneedle Investments, Janus Henderson Group and Hartford Funds Management Group, among others, unwound more than two dozen ESG funds this year, according to data from Morningstar. 

On Sept. 15, BlackRock told regulators it, too, intends to close a pair of sustainable emerging-market bond funds with total assets of about $55 million. 

While the U.S. had 656 sustainable funds as of June 30, according to Morningstar data, the number of liquidations is increasing from prior years. More U.S. sustainable funds have closed in 2023 than the prior three years combined, the data show. Investors pulled more money from the funds in the first half of the year than they put into them.

"We have definitely seen demand drop off in 2022 and 2023," Alyssa Stankiewicz, associate director for sustainability research at Morningstar, said in a phone interview.

ESG

Anti-ESG sentiment forces borrowers to be more thorough, Morgan Stanley says

August 18, 2023 10:16 AM

The closings underscore shifting fortunes for sustainable investing as returns disappoint investors and anti-ESG rhetoric persists. Some sustainable funds fared poorly last year because they were weighted toward growth strategies that underperformed in 2022, while others struggled to gather assets, Stankiewicz said. 

Money managers are now "cleaning up the shelves" by closing products that didn't attract interest and launching new and more specific or different strategies related to sustainable investing, she added.

Money poured into sustainable-investing products in 2020 and 2021, when fund managers debuted more ESG funds or added "ESG" or "sustainable" to the names of existing funds. 

Republican officials responded with attacks on ESG funds, arguing the products harmed states such as Texas and West Virginia that rely on fossil fuels. Enthusiasm for the funds waned more broadly last year after a stock and bond rout and a surge in oil and energy prices dampened ESG funds' performance. Meanwhile, regulators began taking a closer look at fund labels, publishing rules on Wednesday to guard against misleading or exaggerated ESG claims.

BlackRock CEO Larry Fink stopped using the term ESG earlier this year, saying it has become too politicized. Instead he discussed investments tied to the transition to a lower-carbon economy.

Different objectives
The firm is closing two actively managed mutual funds that seek to outperform emerging-market bond indexes while screening out issuers that have more than 5% of revenue from thermal coal mining and oil sands extraction, among other restrictions. The funds, launched in 2008 and 2017, "tilt" to green bonds and those from issuers with certain ESG grades. 

While it's closing those two funds, BlackRock launched two broad ESG ETFs this year with a total of about $9 million of assets, an environmental solutions ETF with about $3.7 million and a sustainable global equity mutual fund with about $10 million, according to data compiled by Bloomberg. 

ESG

Trade group's lawsuit argues state-level ESG rule strikes at heart of client-advisor relationship

August 16, 2023 3:14 PM

The firm also launched a U.S. "climate conscious" ETF, though it's held almost entirely by Finnish pension insurance company Ilmarinen, which controls a roughly $2.3 billion stake, according to data compiled by Bloomberg. The pension shifted its assets from a broader BlackRock ESG fund to the more climate-specific one in June.

"We continually evaluate our product range to ensure clients have options available to meet different investment objectives," a BlackRock spokesperson said in a statement. The firm manages about $35 billion of emerging market bond assets, and has sustainable index and alternative funds geared toward the transition to a low-carbon economy in those markets.

State Street closed three ESG ETFs and Columbia Threadneedle liquidated a social bond fund earlier this year. In August, Janus Henderson decided to shutter its Sustainable Multi-Asset Allocation Fund, according to a regulatory filing. The fund, which had been open only about a year, had about $3.7 million of assets as of Aug. 31.

Janus Henderson declined to comment, while Columbia Threadneedle said the fund was closed because of its small size and limited investor interest. State Street said the company reviewed its ETF products and decided to close the three products based on investor feedback and market demand.

While Hartford Funds decided to wind down one ESG ETF this year, the company took a slightly different approach for a sustainable offering that holds about $195 million of assets. Rather than closing, the Hartford Schroders Sustainable Core Bond fund will drop "sustainable" from its name and shift its principal investment strategy.

As of Nov. 30, the fund will be called Hartford Schroders Core Fixed Income.

—With assistance from Miles Weiss.