By Suzanne McGee
(Reuters) – Parnassus, one of the largest asset managers to offer products tied to environmental, social or governance considerations, launched its first exchange-traded funds on Thursday amid a difficult environment for the strategy.
As performance of U.S. ESG funds lag broader indexes, investor interest is shrinking. According to data from Morningstar Inc., the average U.S. ESG-focused ETF has gained only 11% so far this year, compared to 27.6% for the Standard & Poor’s 500 index. The number of ESG funds in the U.S. fell 8% in the first nine months of 2024 to only 595, with some closing and others abandoning their ESG mandate.
Some segments are struggling more than others: Morningstar reported last month that U.S. climate funds are likely to see their first year of net outflows this year since it began tracking them as a separate category in 2018.
“Clearly the environment is not favorable to this type of new offering, with closures exceeding launches,” said Hortense Bioy, London-based global director of sustainability research for Morningstar.
But Benjamin Allen, CEO of Parnassus, says the 40-year-old firm has ridden out other cycles and remains focused on picking high-quality companies that also consider the impact of their decisions on environmental and social issues on long-term returns. According to the Parnassus website, comparable mutual funds have posted gains of 17% to 22% so far this year.
“This is not virtue-signaling; this has a material impact on returns,” he told Reuters.
Information on the holdings of the new ETFs, the Parnassus Core Select ETF and the Parnassus Value Select ETF will not be available until after their launch. Allen said he expects there to be overlap between each ETF and similar long-established mutual funds, although the ETFs will have no more than 25 holdings.
The $30 billion Parnassus Core Equity Fund mutual fund includes positions in stocks like Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT), as well as Intercontinental Exchange (NYSE:ICE) and Waste Management (NYSE:WM). The $5.1 billion Parnassus Value Equity Fund owns stakes in Bank of America and Deere & Co (NYSE:DE)..