Environmental, social, and corporate governance (ESG) funds have been rejected by lawmakers, decried as a “scam” by the world’s richest man, and villainized as the poster child of “woke capitalism.” And now they’re also getting sidestepped by global investors, which have pulled a net $2.5B from ESG funds for the first-ever quarter of outflows.

Three-letter taboo: The industry was once forecasted to hit $50T by 2025. Instead, some asset managers are abandoning the term altogether — and politics aren’t the only thing to blame. In the last two years, ESG funds have underperformed the S&P 500, which Bernstein’s Zhihan Ma says “can no longer be easily brushed aside,” especially considering its fundamentals:

• Less diversification: Although ESG funds are supposed to reduce risk in portfolios, they often hold fewer individual stocks than popular index funds like the iShares Core S&P 500 ETF (NYSE:IVV).
• Higher fees: ESG investors are paying nearly 5x more than S&P 500-linked index funds likeIVV
  , which carries a 0.03% management fee.

What is ESG, really?

While technically defined, the lack of widely accepted criteria for ESG makes it hard for investors to understand — and even harder for funds using different ESG criteria to decide whether a company belongs in an ESG ETF. The term is often grouped with similarly-sounding and underperforming investment themes like “sustainable” or “socially responsible” investing, complicating matters.

• Companies are increasingly steering away from using the term because of politics and confusion, with mentions by S&P 500 firms dropping 30% from the previous year.
• And according to WSJ, some companies are outright avoiding the term — with Coca-Cola (NYSE:KO) renaming ESG reports and taking the letters away from employee titles.

What’s next? Even if ESG funds fade away, new global standards will soon mandate sustainability and climate disclosures in annual reports. 2024 looks like another eventful year heading into elections, as states are suing to exclude ESG factors from employer accounts and considering criminalizing state investments in ESG.