• Months of headlines have featured GOP politicians criticizing investment firms including BlackRock for offering funds that focus on environmental, social and governance (ESG) issues.
• In a bad year for stocks, investors added less to sustainable funds, but will end the year close to flat in asset flows.
• ESG fund returns were down, but only slightly more than the broad stock market.

You could be excused for thinking, after months of headlines about "woke capitalism" and big stock market declines, that socially-conscious investing was on the run, dogged by hostility from politicians who think that focusing on corporate governance and environmental impact means burning retirees' money to push an agenda other than bottom line return on investment.

But you would be incorrect.

In fact, so-called sustainable funds, also known as ESG funds (for environmental, social and governance) were still seeing net inflows from investors through the end of November, the last month for which complete data is available, and are likely to end the year close to flat or slightly down, according to data compiled for CNBC by Morningstar. The three months previous to December all saw negative flows, and most of the money came in during the first half of the year, but sustainable funds assets still grew amid the market rout by 0.84% through November, better than the 1.1% decline for all funds, according to Morningstar.

The market's struggles in December will likely erase that small gain in net flows by year-end, but the lack of a stampede out of ESG funds belies the negative narrative that has sprung up around ESG investing, said Alyssa Stankiewicz, Morningstar's associate director of sustainable fund research. "Anti-ESG has gotten a lot of attention, and it isn't necessarily reflected in the data," Stankiewicz said. "ESG didn't have that rough of a year at all."

More important to investors than flows, the performance of ESG funds has not been good, but hasn't deviated significantly from a tough year for the market. Analysts who follow the industry say ESG funds' performance has been held back, most clearly, by the fact that many sustainable or ESG funds avoid companies that make fossil fuels. Energy, dominated by traditional players like ExxonMobil and Chevron, is the only one of 11 sectors in the Standard & Poor's 500 stock index to rise this year. 

The average large-cap stock ESG fund had lost nearly 20% in 2022 through Dec. 21, according to Morningstar. That's about 2.4 percentage points worse than the drop in the S&P 500 Index, including dividends. S&P Dow Jones Indices says its S&P 500 ESG Index is down 18.5%, also including dividends.

"Depending on how you slice it, ESG has done OK,'' said David Nadig, an exchange-traded fund expert and financial futurist at VettaFi, a research firm for financial advisers. Within ESG, some clean energy ETFs have had much smaller losses than the broader market, with the iShares Global Clean Energy ETF down about 5%. "It's not that ESG isn't working. It's a down market," Nadig said.

Energy will loom large in ESG again in 2023

Whether the lag in ESG performance continues depends, crucially, on whether oil continues to outperform, since the absence of oil from most ESG funds hurt 2022 results. Morningstar energy strategist Stephen Ellis thinks that's unlikely, since "we see the stocks as fairly valued to expensive," particularly in the oil part of the petroleum business. Meanwhile, Fidelity Investments' portfolio manager Maurice Fitzmaurice wrote on Dec. 14 that oil and gas demand should keep growing as effects of the Covid pandemic pass, while lost supplies from Russia prod oil prices to rise. 

Funds that eschew ESG have turned in mixed performances, with energy the big difference maker. The Constrained Capital Orphan ETF, which concentrates on ESG-disfavored fossil fuel, weapons, gambling, tobacco, alcohol and nuclear energy companies, is up 6% for the year. But the B.A.D. ETF – which emphasizes gambling and alcohol along with pharmaceuticals, without major holdings in oil and gas – is down 18%. 

ESG fund flows in Europe have held up much better than in the U.S, which Morningstar's Stankiewicz says is because of more pro-ESG regulations. 

U.S. regulation is moving, at the federal level, in a pro-ESG direction, but not going as far as Brussels, Stankiewicz said. A new Labor Department rule announced last month reverses a Trump administration policy and allows administrators of 401(k) plans to consider ESG factors, along with shorter-term financial considerations, in selecting investment options for members. 

Also, the Securities and Exchange Commission is considering a rule that will require detailed disclosures from public companies about their climate impact, including their own carbon emissions, emissions from utilities who sell the companies heat and electricity, and emissions by customers who use a company's products.

But there also was increased scrutiny of "greenwashing" in the fund industry by the SEC, with its new Climate and ESG Task Force within the Division of Enforcement investigating ESG-related misconduct.

All the attention, positive and negative, are likely to keep ESG investing on investors' minds, even as it remains a tiny share of the overall market, Nadig said. Its larger impact will come as the SEC rule lets investors make more accurate comparisons of companies' strategies to control their own exposure to climate risk and other governance issues that can affect financial performance, he said.

"Even if you're not an ESG investor now, you're moving to a world where every company and portfolio has an ESG score, just like a price-to-earnings ratio," Nadig said. "It's another metric you can use, or not."