ESG Investments Face Decline Amid Political Backlash and Poor Fund Performance
Environmental, social, and corporate governance (ESG) investments have experienced significant setbacks in recent years due to political opposition, particularly from Republican-led states, and underwhelming fund performance. This backlash included legal actions and policy moves during the Trump administration aimed at curbing climate change initiatives and workplace diversity efforts. As a result, major institutional investors have retreated from actively promoting ESG principles or voting proxies in support of them.
Despite these challenges, proponents argue that ESG investing remains relevant, though it is now pursued more quietly and with less public confrontation. Key data from Morningstar highlights a sharp drop in new ESG fund launches in the U.S., from 116 in 2021 to just nine in 2025, alongside the closure of 91 funds. Since the second quarter of 2022, ESG funds have seen $65.7 billion in redemptions, representing about 20% of their assets, largely due to poor returns linked to avoiding fossil fuels amid rising oil prices during the Russia-Ukraine conflict.
Leading asset managers have adapted differently: BlackRock tripled its ESG funds between 2019 and 2023 but later reduced ESG exposure in model portfolios, experiencing moderate outflows before a slight recovery in 2025. Vanguard maintained a smaller ESG offering with minimal redemptions. Notably, funds like Franklin Resources, once a top ESG manager, have fallen in rankings due to concentrated portfolios and underweighting tech and AI stocks that have driven market gains.
The political backlash has also transformed how ESG is discussed and implemented. CalPERS, the largest U.S. public pension fund, continues to integrate sustainability considerations and plans to increase climate-related investments from $60 billion to $100 billion by 2030. However, the term "ESG" has become politically charged, prompting some investors to frame their approach as simply integrating sustainability rather than explicitly endorsing ESG.
Proxy voting patterns have shifted dramatically, with BlackRock reducing support for environmental and social proposals from 40% to 4%, citing corporate progress on climate disclosures and labeling many shareholder proposals as extreme. This change reflects broader regulatory adjustments allowing companies more discretion to exclude ESG-related proposals from ballots. The era of aggressive shareholder activism on ESG issues has waned, replaced by more pragmatic and less confrontational strategies.
Overall, while ESG investing faces significant headwinds and a decline in public prominence, it continues to evolve quietly within institutional portfolios, balancing political realities with ongoing concerns about climate risk and corporate governance.
