Polls and politics deepen the divergence in ESG investing practices

Political attacks on environmental, social and governance investing have produced large redemptions from labelled sustainable funds even as many investors and advisers continue to pursue impact-aligned strategies, creating a paradoxical landscape in which public rhetoric, product flows and corporate disclosure are diverging.

Net outflows from U.S. sustainable funds have been persistent: Morningstar data compiled by Hortense Bioy shows 13 consecutive quarters of withdrawals, including $4.6 billion in the fourth quarter and about $21 billion in 2025, yet total assets in U.S. sustainable funds reached a record $368 billion at the end of last year, underscoring how shrinkage of flows can coexist with broader asset appreciation. According to an analysis by US SIF, roughly 11% of U.S. holdings , about $6.6 trillion , now fall under ESG or sustainable-investing labels, a figure only marginally higher than 2024 levels as firms reassess how they market and describe those products.

Advisers on the ground describe continued client demand for values-aligned investing even as market-level metrics register retrenchment. “We’re seeing just the same amount of interest and flows in our personal practice, but we leave space for that opportunity, and we talk about it and we give the clients opportunities to do it,” said Victor Orozco, managing partner of Bair Financial Planning and a board member of US SIF. Practitioners say that delivering on clients’ intentions now frequently requires deeper due diligence and more active stewardship rather than reliance on label-driven products.

That pragmatic approach is reflected in engagement work by advisers and asset managers. Keith Beverly, managing partner and chief investment officer at Re-Envision Wealth, described writing to several large companies in December to commend sustainability practices and encourage continued stewardship. “From our vantage point, they’re doing good work and it shouldn’t go unnoticed,” he said, adding that investors must weigh the operational realities firms face amid heightened political scrutiny.

Political pressure has been a significant driver of the recalibration. Reporting and commentary point to a wave of state and federal actions limiting consideration of ESG factors; an advocacy piece tracking the movement found scores of anti-ESG bills introduced by Republican-led states, while regulatory changes at the national level have rolled back disclosure rules tied to corporate payments and, critics say, narrowed the space for climate- and governance-related reporting. According to Impakter, more than 165 anti-ESG bills were introduced across 37 states in 2023, reflecting how the issue has become a partisan battleground. The repeal of federal rules on reporting by extractive companies under the previous administration exemplifies the policymaking environment that advisers cite when explaining why firms are altering public language.

Those pressures are visible in company filings and workforce disclosures. Research from PeopleReturn, and commentary by its founder Joshua Ramer, indicates a steady “linguistic migration”: explicit board recruitment policies prioritising women and minorities have declined and fewer firms are publicly releasing the workforce demographic details previously filed with regulators. Meredith Benton, founder of Whistle Stop Capital, characterised the change not as an abrupt collapse but as a modest retreat from the high-water mark of 2020–21. “There has been, honestly, a relatively small decline in terms of disclosure,” she said, noting that overall data levels remain above earlier periods even if specific commitments are less prominent.

Market forces have amplified the pullback. Analyses of fund flows and sector performance attribute part of the outflows to macroeconomic conditions: higher interest rates have undercut growth-oriented sectors such as clean energy, while accusations of greenwashing and concerns about underperformance have eroded investor confidence in some ESG-themed strategies. An industry review showed U.S. ESG funds recorded sizeable withdrawals in 2023 and 2024, and Europe experienced its first net outflow from ESG funds in the first quarter of 2025, signalling a wider reassessment of sustainable products.

At the same time, academic and industry research suggests the investor base for ESG has shifted rather than vanished. A study by Stanford-affiliated researchers published in the Harvard Business Review found the generational gap in ESG interest has narrowed: older and younger investors now report more similar levels of concern about ESG issues and support for shareholder activism than three years ago. The authors argued that ESG will persist where risks are tangible, time horizons are clear and trade-offs transparent, with climate-related risks fitting that mould more cleanly than much of the social agenda.

Data and technology are playing a greater role as advisers and active managers attempt to navigate fuzzier public signals. Firms are increasingly relying on proprietary datasets, engagement records and specialised extraction tools to verify corporate behaviour and quantify impact. Academic work on automated extraction of ESG disclosures using large language models , for example the ESGReveal method described in recent research , points to improving accuracy in pulling structured data from narrative reports, a capability advisers say is useful when companies moderate public claims.

The result is a more cautious but still active ecosystem. Some asset managers have quietly recast product descriptions to emphasise fiduciary duty and financial materiality rather than broad stakeholder rhetoric, while others continue established sustainability strategies with little change. “You want to make sure that the vehicles you’re using are aligned with the principles that are important to clients,” Orozco said. “You’ve just got to put a little bit more elbow grease into it, which is unfortunate. But that’s the moment that we’re in, which is just hiding in plain sight.”

For investors and corporate leaders alike, the current phase looks less like wholesale retreat than a redefinition: labels are being tightened, public prose softened, and active engagement and measurement elevated as the durable routes through which impact objectives will be pursued in an environment shaped by politics, market cycles and evolving investor expectations.