‘Anti-ESG funds’ are now a thing (and peaked at $376M in Q3 2022)

One of the defining characteristics of life in the U.S. during the last two decades is that many Americans have come to see nearly everything through a political lens. And this divided, contentious political view of modern life has come to the investment world as well.

ESG investing—investment strategies that consider environment, social, or governance factors—is not new. Investors first started considering such factors at least as far back as the 1960s, when some American investors divested themselves of stocks from tobacco companies. However, there has a been an anti-ESG boom in the last two years, with several new funds coming online.

The focus on ESG has a long history, but it has been in the spotlight more in recent years, as some employees from younger generations seek to embrace investments that may make a difference in social or environmental issues. Still, according to CNBC, ESG investment stood at about 12.6% of all U.S. assets under management during 2022, which equaled $8.4 trillion.

The new anti-ESG movement

As noted above, investment strategies are not immune from political division, and in recent years there has been a growth in “anti-ESG funds.” According to a new report from Morningstar, Anti-ESG Funds Make Noise. Here’s What They Look Like, anti-ESG funds started in the 2000s, but really took off in 2022. “These strategies come in different flavors but have in common their aim—providing an alternative to ESG investing,” the Morningstar report said. “Anti-ESG funds come in different shapes and sizes. The oldest invest in companies known as ‘sin stocks’ that were traditionally excluded by socially responsible funds. Some invest in companies aligned with politically conservative values. Others are traditional passive funds with anti-ESG proxy-voting policies.”

Funds in the anti-ESG categories can have descriptive names, such as “VICEX,” “MAGA,” “YALL,” and “DRLL.” The oldest of them, VICEX, was launched in 2002.

The Morningstar research found 26 funds that either marketed themselves as such or were seen as investing against ESG principles. The funds broke down into different categories, with some funds having characteristics of more than one of the categories. These include:

• Anti-ESG– funds use environmental, social, and governance data to build portfolios by tilting toward companies that management believes are unduly penalized by ESG ratings providers.
• Political—these funds tend to refer to a “woke, liberal agenda” when outlining investment strategies, and which tend to support conservative values.
• Renouncer—these are funds that previously embraced ESG principles but have removed references to those principles from fund names and documents.
• Vice—these funds invest in companies that might have traditionally been excluded by ESG funds and can include sin stocks, such those associated with alcohol, tobacco, weapons, and gambling.
• Voter—this category is descried as traditional passive funds with voting policies in opposition to ESG principles.

“Anti-ESG investments come in all shapes and sizes,” the report said. “As such, the lines between these five anti-ESG categories are blurred, and in many cases, it is unclear whether a fund qualifies as anti-ESG, a plain-vanilla index fund, a niche thematic offering, or something else entirely.”

Related: ESG investing: House Republicans outline policy goals in new interim report

The analysis noted the highly partisan nature of these funds, not only in their general principles, but in the language that the funds use to describe themselves to investors. “It is important to note that Morningstar does not view ESG investing as specific to any one political party, but the recent explosion in anti-ESG sentiment is driven primarily by a vocal subset of Republican politicians,” the analysis said. “One Political fund— American Conservative Values ETF ACVF—seeks to avoid companies ‘perceived as hostile to conservative values’ based on the philosophy that ‘politically active companies negatively impact their shareholders’ value by … supporting issues and causes, which are opposed to conservative political beliefs.’

A fast start, but questions remain

The Morningstar report noted that anti-ESG funds grew rapidly in 2022.

“Boosted by product development, flows into anti-ESG funds peaked at $376 million during the third quarter of 2022, more than 5 times the previous record seen in the first quarter of 2021,” the report said. “More than 80% of that was collected by Strive’s first fund—Strive U.S. Energy ETF—which attracted nearly $100 million in its first week and more than $300 million in its first month.”

However, that fast pace slowed. Strive’s second fund, Strive 500 ETF STRV, picked up only $33 million in its first month, and the Morningstar analysts said demand for anti-ESG funds has generally been muted.

According to an analysis by Morningstar’s Alyssa Stankiewicz, associate director of sustainability research, the anti-ESG movement has lost some steam in recent months. She said that most of the action in the anti-ESG sector came from Strive, but even that fund has slowed after the third quarter of last year. “Strive looked poised to continue this momentum when it launched seven more funds over the following three months, but what started as a downpour slowed to a drizzle,” she wrote.

In an online discussion of the report, Ben Butler, associate quantitative analyst with Morningstar, pointed out another interesting fact: some anti-ESG funds have significant involvement in climate action investment—an area that is considered foundational to pro-ESG investment.

“These anti-ESG funds were significantly higher in exposure to climate action than what you might have guessed from an anti-ESG. This is just from looking at the stocks and bonds underlying the fund; if they are involved in some way with climate action,” he said. “Some of these funds were pretty significantly involved in climate action.”

Regardless of the bumps in the road, anti-ESG funds are likely to keep rolling along, not the least because one of their proponents is running for president. Vivek Ramaswamy, co-founder of Strive Asset Management—home of the funds mentioned above—is running for President as a Republican with an “anti-woke” platform.

Ramaswamy is considered a long shot, but his personal wealth of more than $500 million may be useful in spreading his message. And considering the moves to fight “wokeness” by state politicians such as Florida Gov. Ron DeSantis (another presidential contender), Ramaswamy might have an additional goal in mind—getting anti-ESG funds a wider hearing with conservative lawmakers.

“As Ramaswamy’s megaphone grows louder, his firm is approaching state officials to discuss its funds and proxy advisory consulting services,” an analysis by Axios recently noted.