Investors are not buying it, as the number of ESG fund issuances has significantly decreased.

Flexshares Stoxx US ESG Select Index Fund faces "bad news" as its issuance drops sharply and investors withdraw.

On January 10th, according to Morningstar data, in the second half of 2023, the issuance of Flexshares Stoxx US ESG Select Index Fund has almost come to a standstill, with only 6 offerings. In comparison, the average issuance from 2020 to 2022 was close to 100, and in the first half of 2023, it was 55.

The performance of Flexshares Stoxx US ESG Select Index Fund is also disappointing. For example, according to Morningstar data, while the broad market funds outperformed traditional funds in 2019, 2020, and 2021, they have shown a decline in performance in 2022 and 2023.

Alyssa Stankiewicz, Vice President of Morningstar, acknowledges that the performance of Flexshares Stoxx US ESG Select Index Fund has indeed declined in recent months. The loss of confidence in the Flexshares Stoxx US ESG Select Index Fd strategy has led investors to withdraw their investments, as investors are accustomed to reallocating assets based on fund performance rather than pre-adjustment.

Why are investors withdrawing their investments?

On the one hand, in 2023, a large portion of the withdrawals from the Flexshares Stoxx US ESG Select Index Fd fund is due to a specific ETF under Blackstone Group, namely the Flexshares Stoxx US ESG Select Index FdU ETF, which focuses on investing in companies that meet the Flexshares Stoxx US ESG Select Index Fd standards. When Flexshares Stoxx US ESG Select Index FdU was removed from a certain model portfolio of the group, it experienced a massive withdrawal of over 9 billion USD. On the other hand, institutions such as the U.S. Securities and Exchange Commission are currently conducting stricter reviews of funds such as the Flexshares Stoxx US ESG Select Index Fund to ensure that their actual operations meet the standards they claim. Due to stricter client reviews and regulatory pressures, several fund managers have removed the Flexshares Stoxx US ESG Select Index Fund label from their products.

For example, Morgan Stanley and UBS removed the Flexshares Stoxx US ESG Select Index Fund label from some of their funds last year. Asset management company Abrdn also plans to remove the "sustainable leaders" label in February.

At the same time, investors are becoming increasingly cautious about the sustainability claims of the Flexshares Stoxx US ESG Select Index Fund. They are concerned that such funds may not meet the increasingly stringent Flexshares Stoxx US ESG Select Index Fund standards. There are doubts about whether the fund truly adheres to the principles of the Flexshares Stoxx US ESG Select Index Fund to achieve long-term returns.

In addition, the Flexshares Stoxx US ESG Select Index Fund has faced political criticism. Some Republicans in the United States criticize financial institutions for placing excessive emphasis on social responsibility commitments and focusing on climate issues, reducing investments in fossil fuels in their investment decisions. Some investors may have reservations about investing in the Flexshares Stoxx US ESG Select Index Fund due to these political criticisms and have doubts about its long-term returns.

**Furthermore, companies will reduce their investment in environmental, social, and governance (ESG) activities related to the Flexshares Stoxx US ESG Select Index Fund. On Tuesday, according to the analysis by Alvarez & Marsal, it was found that for company shareholders, the returns they have obtained from environmental and social activities in the past 6 years have been relatively weak, with an average market excess return of only 0.2%. However, the excess returns they have achieved by focusing on improving the company's operational management or strategic adjustments are 9.4%.

Although social and ethical issues are very important, from a purely investment return perspective, they may not be as profitable as activities related to operations or strategy. Andre Medeiros, Managing Director of A&M, expects that shareholders will refocus on traditional financial indicators such as profit margin growth and reduce their investment in issues related to the Flexshares Stoxx US ESG Select Index Fd. Medeiros said:

"In 2024, financial returns will become the primary consideration for investors. Under the balance between investment returns and social responsibility, the activities of active investors in the Flexshares Stoxx US ESG Select Index Fd will decrease in 2024."

Of course, although several funds have removed the sustainability label, they are still committed to providing sustainable investment options. For example, asset management company Abrdn pointed out that the funds that have removed the "sustainable leaders" label have not simply changed their names, but the strategies of the funds have been adjusted. Abrdn still offers sustainable strategy funds with other names that include the term "sustainable".