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Several large asset management firms in the US have closed over twenty environmental, social, and corporate governance (ESG) funds in 2023 due to poor performance and amid greenwashing allegations. The US SEC also recently adopted a new rule to clamp down on funds that falsely advertise ESG strategies. 

More ESG Funds Closed in 2023 than Previous 3 Years

Prominent money managers like BlackRock have been ditching their ESG funds lately due to increasing political backlash and investor scrutiny related to greenwashing concerns. According to Morningstar data, asset management firms like Columbia Threadneedle, Janus Henderson, and State Street, among others, abandoned over 20 ESG investment products in 2023.

Earlier this month, the world’s largest asset manager, BlackRock, informed regulators it plans to close a pair of sustainable emerging-market bond funds, with total assets under management of roughly $55 million. 

Although the US had 656 ESG funds as of June 30, the number of liquidations has risen compared to earlier years. More sustainable funds have been shut down in 2023 than in the three previous years combined, Morningstar data revealed. Furthermore, investors withdrew more capital from the funds in the first half of 2023 than they deposited. 

“We have definitely seen demand drop off in 2022 and 2023.”

– Alyssa Stankiewicz, associate director for sustainability research at Morningstar, told Bloomberg.

This downtrend has been primarily attributed to the declining performance of sustainable funds and investors’ concerns over greenwashing. ESG funds have also been scrutinized by Republican officials, who argued the products harmed states dependent on fossil fuels, such as Texas and West Virginia.

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SEC Passes a Regulatory Change to Crack Down on Funds Greenwashing

But that’s not the end of fund managers’ woes. On Wednesday, the US SEC passed a new rule to crack down on greenwashing and other misleading market practices by US investment funds. 

In particular, the securities regulator amended the 2 decades-old ‘Name Rule,’ which now requires that 80% of a fund’s portfolio match the asset advertised by its name. The move is meant to tackle a boom in funds across Europe and the US that have attempted to exploit investors’ interest in ESG funds, many of which do not accurately reflect their investment strategies.

“A fund’s investment portfolio should match a fund’s advertised investment focus. Such truth in advertising promotes fund integrity on behalf of fund investors.”

– the SEC chair Gary Gensler said.

Financial reform proponents allege that billions of dollars are invested in popular sustainable funds that may even endorse fossil fuel productions and do not meet the ESG goals promoted by their names.

Should more global regulators follow suit and crack down on ESG funds to reduce greenwashing? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.