Roughly three years after environmental investing reached fever pitch on Wall Street, greenwashing concerns, political pushback and perceived underperformance have dimmed enthusiasm for climate-friendly investments.

Pledges by corporations to be carbon neutral or eventually carbon free have been undermined by claims of deceitful marketing practices and hit by partisan skepticism, likely contributing to a decline in flows into securities promoted as environmentally friendly.

Investors withdrew a net $2.5 billion out of sustainable funds globally in the fourth quarter of 2023, the first worldwide net quarterly outflows from such funds on record, data from Morningstar shows. In the US, investors pulled a net $5.1 billion out of sustainable funds in the period and a total of $13 billion over the course of 2023.

At the peak in 2021, US investors pushed nearly $69.8 billion into funds that use environmental, social and corporate governance criteria to assess the societal impact of their investments according to Morningstar.

"US demand for sustainable funds has slowed down," said Benjamin Felix, head of research at PWL Capital. "It does seem that sentiment on ESG has shifted."

Views on green investing sour

Attitudes about environmentally conscious investing have grown pessimistic, according to a survey released in December 2023 by Stanford University, the Hoover Institution and the Rock Center on Corporate Governance.

The survey found that investors of all ages had grown less concerned about environmental issues, such as carbon emissions goals and renewable energy sourcing. According to the survey, 70% of millennials and Gen Z investors said in 2022 that they were very concerned about these issues. That number plunged to less than 50% in 2023.

In addition, the survey found that investors were less willing to lose money for companies to pursue environmentally friendly goals. For example, just 9% of millennials and Gen Z investors surveyed in 2022 said they were not willing to lose any money for a company they were invested in to change from industry-standard carbon emission levels to a "net zero" standard by 2050. Just a year later, 22% of survey respondents said the same thing.

"While I think climate change and environmental concerns are important to investors, there is also a lot more cynicism about ESG investing given recent claims of greenwashing and other controversies," said Michael Hewson, chief market analyst for CMC Markets. "While we need activism to try and drive change, we also need pragmatism to achieve it, and currently we have too much of the former, and too little of the latter."

ESG fight

After a surge of investment into stocks of companies that have pledged to fight climate change, the trend has hit a rough patch, said Charles Boakye, an equity analyst at Jefferies who leads the company's energy transition work for North America.

Funds have rebranded investment products, removing titles and references to ESG and carbon-free, fund managers have been criticized for chasing environmental objectives at the cost of profits and Republican lawmakers across the US have pursued anti-ESG legislation, arguing that investments need to be based on asset values and not exclude certain sectors.

Investments with more perceived environmental leanings have not proven significantly less profitable than others.

The S&P 500, which is up about 2.7% from early 2022, has moved roughly in tandem with the S&P 500 Net Zero 2050 Paris-Aligned Net Index, which is up about 1.2% over the same time period. The Net Zero index includes nearly 80% of the S&P 500 by market capitalization, an indication of how many companies have made carbon-free pledges.

"Having a net-zero commitment or having some sort of environmental claim, is now common practice and common standard," said Boakye with Jefferies.

Environmentally focused investors, however, are becoming more skeptical of those claims and do not see a vague pledge as a good reason to invest in a company. Investors are more sophisticated and want more than just net-zero goals, according to Boakye. They are looking for details, plans and timelines for achieving those goals.

"The standard has moved from just having a target to more granularity around that," said Boakye.

A majority of US investors still consider environmental factors when making investment decisions, but the classification has become misunderstood, according to Callie Cox, a US investment analyst at eToro.

"ESG labels aren't something to blindly invest into," Cox said. "They're a tool that can help you measure the unsystematic risk of a stock in a nontraditional way, outside of numbers you'd see on a balance sheet or income statement."

The distinctions may not give a complete picture of a company, but they offer additional transparency, something investors are increasingly looking for, Cox said.