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Investing ethically will not buy protection in this market

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking on the same link.

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As the economy began to recover from the coronavirus pandemic, interest in investment products that fostered good environmental, social, and governance practices gained momentum.

But as markets have come under pressure this year, so-called “ESG” funds have begun to struggle.

What happens: Funds that prioritize responsible investment and ESG issues experienced net outflows of more than $ 39 billion in February and March, according to data from Refinitiv Lipper, which was delivered exclusively to Before the Bell.

These funds had not lost more money than they brought in since March 2020, when the market crashed due to the start of Covid-19.

Degradation: Fund managers have not suddenly stopped worrying about the company’s values. Instead, the fate of these funds has been tied to what is happening in the financial markets more broadly.

ESG funds often favor fast-growing companies and technology names, said Bob Jenkins, head of research at Refinitiv Lipper.

These firms have stumbled this year as investors – by assessing the impact of rising interest rates, a slower economic recovery and the outbreak of the war in Ukraine in February – shifted their money to betting on companies considered undervalued or less risky . This meant that ESG funds, which own lots of shares in these companies, also stumbled.

“ESG funds have a large exposure to technology and growth stocks – more than the market as a whole,” Jenkins said. So when there is a rotation away from these types of stocks, “we can expect to see both the broader market and, to a lesser extent, ESG funds, trending down.”

Take iShares ESG Aware MSCI USA ETF, a popular exchange traded fund that has more than $ 23 billion in net assets. Its top stocks include Apple (AAPL), Microsoft (MSFT), Amazon, Tesla (TSLA) and Google (GOOGL)’s Alphabet – all stocks whose performance has been volatile this year as investors reconsider whether it’s time to turn gone.

Investor Insights: Jenkins does not expect a major jump in the ESG sector in the near future. The Nasdaq Composite ended 13% lower in April, the worst month since October 2008. The S&P 500 fell 8.8%, the largest monthly decline since March 2020.

“Here in the early part of [the second quarter]we have seen a return to selling… once again plaguing the growth and the technological names that are so prevalent in ESG funds, ”he said.

Big picture: ESG investments are still huge. Global assets under management that met Refinitiv Lipper’s ESG criteria were just over $ 7 trillion at the end of the first quarter. But for the first time in two years, some of the wind has come out of the sails of these funds. There may be more difficult months ahead.

Amazon’s first quarterly loss since 2015 – which sent the company’s shares down 14% on Friday – marked the rough center of a tumultuous earnings season as companies dealt with rising costs and consumers worried about the highest inflation in four decades.

Check-in: Earnings for the first three months of the year are set to grow by 7.1%, according to a FactSet analysis. This means that the S&P 500 may be due to its weakest earnings growth since the end of 2020.

Amazon’s big miss certainly did not help. FactSet found that the company was the largest single contributor to the S&P 500’s earnings growth so far. If the data provider excluded the company from its calculations, revenue growth would actually come closer to 10%.

The problems that Amazon (AMZN) faced are signs of broader weaknesses as companies share first-quarter results.

The company faced difficult comparisons with a year ago. As the recovery from the pandemic was gaining momentum, Amazon earned $ 8.1 billion in profits in the first three months of 2021. Earnings per share. share was the second highest ever.

However, the global economy slowed significantly in the first three months of 2022 as the war in Ukraine exacerbated supply chain challenges and new coronavirus lockdowns in China clouded the outlook.

As the war drives up the price of fuel, companies are also becoming concerned about whether consumer consumption may remain strong, weighting their guidance for future quarters.

“There are no indicators that we are seeing weakness in consumer demand, but we are wary of it – as probably all businesses are – because household budgets are tightening when fuel costs double,” Amazon CFO Brian Olsavsky told analysts last. week.

On the way: About 55% of the companies in the S&P 500 have reported their results. This week, major releases are to see Pfizer, Starbucks and CVS.

The largest economies in the world are going through the toughest course since the pandemic broke out, increasing the once so unlikely likelihood that a recession could be just around the corner.

America’s economy shrank unexpectedly in the first quarter of 2022, surprising forecasters and raising alarms that the Federal Reserve’s plans to withdraw financial support to fight inflation could make things worse.

Consumption spending is holding right now. Most of the decline came from a decline in inventory investment as companies spent less money on keeping shelves in stock. But economists are increasingly concerned about what happens next year when the Federal Reserve’s aggressive (if delayed) approach to tackling price increases will really start to bite.

Meanwhile, Covid lockdowns have taken a heavy toll on China. The latest government survey data released over the weekend shows that activity across production and services has fallen to its lowest level since February 2020.

And data released on Friday showed that the European economy slowed in the first three months of the year due to a combination of rising inflation and early fallout from the war in Ukraine.

Takeaway: Europe and China could create major problems for the global economy this year, while the outlook for the US looks increasingly uncertain as we head into 2023. Recession talk leads nowhere.

Newspaper (CAR) and Clorox (CLX) report results after US markets close.

Also today: ISM Manufacturing Index for April records at. 10 ET.

Coming tomorrow: Earnings from BP (BP), Pfizer (PFE), Lift (LIFT), Airbnb and Starbucks (SBUX).

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