Ethical investors hit by worst ever year as allure of ESG wanes

ETHICAL funds suffered their largest outflows on record in 2023 amid declining interest in green investing.

Investors pulled a net £2.4bn from funds last year which are focused on environmental, social and governance issues (ESG), data from global funds network Calastone showed.

Withdrawals are the highest since at least 2015 when records began, Calastone said, and compare with their peak in 2021 when net inflows surged to £11.2bn.

It comes following a boom in so-called ethical investing, which has faded amid concerns about greenwashing by companies.

Half of investors polled by the Association of Investment Companies in October said they were unconvinced by ESG claims made by asset managers.

Larry Fink, the boss of the world’s largest asset manager Blackrock, in June said he no longer used the term “because it’s been entirely weaponised by the far Left and the far Right”.

The energy crisis and global political upheaval has also triggered a resurgence in demand for oil and gas and defence stocks.

Just last week, British defence stocks hit record high as tensions in the Middle East and the war in Ukraine continue to stoke global demand for military hardware.

In a blow to the Chancellor, investors also pulled a net £8bn from London-listed firms last year, Calastone said. Jeremy Hunt is facing calls from FTSE 100 bosses to end the “vicious cycle” of Britain’s stock market decline. Bosses have raised concerns over the City’s position on the world stage after a string of high-profile companies snubbed it for listings in the United States.

In the US, equity funds posted record net monthly inflows in December alone at £968m, the data showed.

European funds also outperformed the UK with a nearly £500m boost at the end of the year in the second-best month on record. It ended two years of net withdrawals. The analysis noted that money market funds, meaning low risk investments in assets such as cash and short-dated debts, emerged as the big winner in 2023.

Investors poured a record £4.4bn into such funds, more than in the previous eight years combined, as interest rates surged across the world.

Yet the boom is not expected to last as risk appetite is rising again amid expectations of rate cuts, with December seeing a notably smaller net inflow into the sector.