The 5 categories of 'anti-ESG' funds, according to Morningstar

More than two dozen funds investing in direct opposition to ESG criteria topped a combined $2 billion in client assets earlier this year — a sevenfold jump from the same time in 2022.

A record $376 million flowed into the nascent category of asset management products in the third quarter last year, according to a report earlier this month by Morningstar Research Services Associate Director of Sustainability Research Alyssa Stankiewicz and Associate Manager Research Analyst Mahi Roy. More than 80% of that flowed to Strive Asset Management, the firm co-founded by Republican presidential candidate Vivek Ramaswamy. 

The report analyzed a grouping of funds that remains tiny compared to the trillions invested in ESG-driven strategies but is growing in intensity amid a conservative political backlash. Republican scrutiny of giant asset managers like BlackRock comes alongside other skepticism about whether the big fund firms are actively driving more sustainable investments or simply engaging in "greenwashing." Stankiewicz and Roy dug below the political rhetoric to divide the "anti-ESG" investing movement into five categories.

"It was the first time that Morningstar systematically looked into anti-ESG funds," Stankiewicz said at a webinar discussing the report's findings. "It's always kind of fun to start research from the ground up that hasn't been done, and I think we learned a lot."

After the flows "skyrocketed" last year, they have been more "muted" in 2023, she said, declining to predict whether there may be an additional influx during the next presidential race. Last year's midterm elections included many Republican candidates who regularly bashed ESG on the campaign trail, and Ramaswamy's entrance into the race suggests that debate could continue during the race for the White House in 2024, Stankiewicz added.

Ramaswamy stepped down from the firm during his underdog campaign for the Republican presidential nomination, but he released a book in April called "Capitalist Punishment: How Wall Street Is Using Your Money to Create a Country You Didn't Vote For."  

"The ESG movement contends that all it needs to do is refocus capitalists on their own long-run interests and that doing so will also solve all the world's injustices," he wrote in the book. "This assertion is founded on stakeholder capitalism's nebulous promise that since we're all in this thing called life together, what's best for the group in the long run will also necessarily be best for the individual. But what's best for a family isn't automatically what's best for each member of it. What's best for a company isn't automatically what's best for each of its employees."

Sustainable investment manager Earth Equity Advisors, a Prime Capital Investment Advisors company, hasn't detected any impact from the conservative pushback against ESG, Partner Peter Krull said in an interview. The firm has topped $150 million in client assets, and registered investment advisory firm Prime Capital purchased Earth Equity in a deal announced at the beginning of the year. Adherents view ESG data and sustainable screening as aspects of their fiduciary duty "to know as much as we can about any investment," Krull said.

"It is purely rhetoric," he said of the backlash. "Its intention is to divide and say, 'It's another us-versus-them thing. It's not about investing. It's just simply political rhetoric."

Few voters receptive to those arguments would have been likely to invest with Earth Equity or firms like it anyways, he added.

For a description of the five main categories of anti-ESG funds in Morningstar's research into 26 different products, scroll down the slideshow. To see research about which publicly traded companies get the best and worst grades on racial equity, click here. And for a deep dive into the complexities surrounding ESG criteria and sustainable investing, follow this link. 

Wealth management

The battle for the soul of ESG

June 20, 2023 2:50 PM

Note: The information below comes from the report by Morningstar research analysts Alyssa Stankiewicz and Mahi Roy from earlier this month, "Anti-ESG Funds Make Noise. Here's What They Look Like." All data is as of the end of the first quarter. 

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