U.S. ESG funds weathered both financial market and political storms last year, according to a report issued Thursday by ISS Market Intelligence.
The State of the ESG Fund Market report from he fund intelligence arm of investment advisor Institutional Shareholder Services shows that $3 billion in net flows for ESG funds ended 2022 on the positive side, as most other product types saw heavy outflows.
By the end of the year, long-term ESG fund assets under management were $319 billion, representing 1.5% of all long-term funds, which in 2022 shrunk by 1.4%, while ESG funds grew 0.8%.
Although new fund launches slowed in 2022 for all product types, 89 new ESG strategies went live, with 75% of those actively managed and nearly half active ETFs.
The 89 new ESG launches were down from a record 133 launches in 2021, but ahead of 2019 and 2020 levels, the ISS Market Intelligence report said.
The number of funds using ESG factors in their investment strategies reached record levels in 2022, based on the report's review of prospectus language. Between that and the volume of ESG funds by assets, the report finds that funds representing more than $1.9 trillion in assets incorporated ESG elements into their investment process in 2022.
A big share of that was due to American Funds' disclosure in early 2022 that it would include ESG factors in its investment process firmwide, the ISS IM report said.
One downward trend the report noted was weakening adviser sentiment, with two-thirds fewer in 2022 saying they were highly likely to recommend an ESG fund.
The report also cautioned that "the red state ESG backlash is real," although the impact on ESG fund assets has been modest and federal policies will keep the market healthy. "Fund managers will need to address ESG's growing image problem to reap the benefits," the report said.