The backlash against environmental, social, and governance (“ESG”) investing has been swift and fierce. More than 20 U.S. states have passed laws or taken administrative action targeting ESG considerations in asset management. Flows into ESG funds have slowed, and for the first time since the ESG boom began around 2017, total assets in ESG-branded funds have declined. After a decade in which ESG reshaped corporate governance and investing, commentators have rushed to declare ESG “fading,” “dying,” or “beyond redemption.”

In a recent paper, I track the demand for ESG mutual funds over the rise and apparent fall of ESG interest. Building on the large finance literature that links mutual fund flows to past performance, the paper measures whether funds with ESG-related names attract more investor money than comparable conventional funds once returns and style are held constant. By repeating this measurement each month, the paper constructs a time-varying indicator of investor demand controlling for performance that gives insight into when, and by how much, investors have favored or shunned ESG-branded funds. Because the relative performance of ESG funds has shifted over time, controlling for performance-flow effects is essential to understanding the demand for ESG asset management.

At certain points, investors clearly did reward ESG funds. From late 2017 through early 2020, and again – though more modestly – in 2021, ESG funds drew significantly higher inflows than would have been predicted from their past performance.  Investor interest in ESG peaked in early 2020, then fell sharply around November 2020 well before the wave of state laws or heavy media criticism began in 2022. Abnormally  high flows to ESG funds have not been a regular feature of the fund landscape since then. In recent years, ESG funds have performed much like other funds once returns are considered, suggesting investor enthusiasm has cooled but not collapsed.

Breaking flows down by investor type reveals an important distinction between institutional and retail demand. The early ESG surge from 2017–2020 came almost entirely from institutional share classes, while retail investors lagged. Only in 2021 did retail demand rise meaningfully, and even then, it never reached institutional levels. Institutional investors led the ESG boom and also the retreat, suggesting that large professional investors – not retail sentiment – drove the early enthusiasm and subsequent slowdown.

Are investors fleeing ESG altogether? Not quite. Despite headlines about ESG’s demise, fund flows only turned materially negative for ESG-branded funds in two months during 2024, and even then, the effect was concentrated in institutional share classes – large, professional investors. Most months since 2020 show flows roughly in line with non-ESG funds once performance is controlled for. The ESG brand has lost its shine, but investors haven’t abandoned it, they’ve just treated ESG funds like other funds.

How does the ESG backlash interact with the legal backlash? The paper examines the backlash along two dimensions: legal constraints and the political environment.

Legally, the Trump-era Department of Labor sought to limit ESG investing in retirement plans subject to ERISA, a rulemaking that coincided with falling demand for ESG funds, especially among institutional investors. Whether this relationship is causal is doubtful, since many 401(k) plans don’t offer ESG options. Since 2022, many conservative-leaning states have passed laws restricting state funds or contractors from using ESG criteria. These state initiatives peaked in 2023, the same year ESG assets under management declined. Yet when fund flows are adjusted for performance, they remain steady across this period. Reviewing these statutes alongside the DOL’s original rule suggests that most state measures are unlikely to have more than a marginal effect on investor behavior, though a few states have enacted provisions that could plausibly constrain asset managers.

Even without binding laws, political polarization could still matter. The term “ESG” has become a partisan flashpoint, and reputational damage can depress demand even if regulation does not. To test this, I compared fund flows with both state legislative activity and the frequency of “ESG” mentions on Fox Business Channel, a proxy for conservative media attention. Across multiple specifications, there is little evidence of a causal link between the political backlash and the timing or magnitude of ESG fund flows. Tests for Granger causality among three time series: ESG fund flows, state anti-ESG laws, and conservative media attention, show no strong evidence that either the legal or political dimensions of the backlash caused changes in ESG demand. The timing runs the other way: Flows fell before politics intensified.

Some caveats: This analysis focuses on mutual funds that explicitly advertise themselves as ESG in their names. These funds are only a slice of the ESG universe, which also includes the much larger pool of conventional funds whose managers publicly pledged to integrated ESG factors into investment decisions or vote proxies in line with ESG goals. Many of these large asset managers have backed off these public commitments, and this seismic shift is not captured by an analysis of ESG branded funds. Still, ESG- mutual funds are an ideal laboratory to observe demand for explicitly ESG products.

If ESG’s golden age has passed, its obituary is premature. While political backlash has certainly put pressure on some asset managers to be more cautious in their approach to social and environmental issues, money moves mainly in response to performance. ESG funds seem to be no exception.

 This post comes to us from Professor Quinn Curtis at the University of Virginia School of Law. It is based on his recent article, “The ESG Backlash and the Demand for ESG Mutual Funds,” available here.