Investors in May pulled $3.5 billion from U.S. mutual funds using environmental, social and governance (ESG) factors, researcher Morningstar Inc said on Thursday, a break with years of net new deposits.
Monthly momentum for what Morningstar terms "sustainable" funds has waned since January 2021 when inflows peaked at $10.3 billion.
But the May number marked the first net withdrawals since the $266 million taken out of the funds in December 2018, the first month Morningstar kept track of funds including those seeking to limit their ESG risks or those looking for ESG opportunities.
Most sustainable funds are equity funds, leaving them vulnerable to ongoing share price declines, said Jon Hale, Morningstar director of sustainability research.
"The market is the factor driving outflows. It will turn around once the market turns around," Hale said.
Investors pulled a total of $39 billion from long-term U.S. mutual funds and ETFs in May, following $94 billion in net withdrawals in April. It was the first two-month stretch of overall fund outflows since the end of 2018, Morningstar said.
ESG investing faces pressures including scrutiny from U.S. regulators about how the funds are advertised, and pushback from some Republicans who say they take too much account of policy issues. Hale said he expects forthcoming SEC disclosure rules should help investors understand ESG funds better.
Last year investors put a record $69.2 billion of net new deposits into sustainable funds, a 35% increase over the previous record in 2020, according to earlier Morningstar data, as investors focused on issues like climate change and workforce diversity.
For the first five months of this year sustainable funds took in $7.5 billion, compared to $35 billion for the same period of 2021.