(Bloomberg) -- Once a thriving corner of the $6.9 trillion US ETF industry, ESG investing is showing signs of weakness as flows wane and the group comes under growing targeted political attacks. A further, more subtle threat to the sector’s future is the concentration of the few firms backing it.

That’s because the environmental, social and governance slice of the US exchange-traded fund market is highly institutional, making it more reliant on decisions by a handful of firms rather than a more diverse investor base. This could exacerbate the sector’s market volatility and put its growth prospects at risk as headwinds mount from political factions as well as the broader economy and rising interest rates, according to Bloomberg Intelligence. 

“The concentrated nature of inflows and outflows may result in continued swings in flows, which could slow long-term growth if the few big investors exhaust their allocations,” said BI senior ESG strategist Shaheen Contractor.

Read more: ESG Stock Funds See Cash Yanked Out as Once-Booming Niche Cools

Globally, just 11 institutions own 29% of sustainable US ETF assets in the US, according to data compiled by BI. The biggest providers are BlackRock Inc., Vanguard Group Inc. and Invesco Ltd., which dominate two-thirds of the North American ESG ETF market share.  

The style of investing has become a divisive political topic in the US as Republican lawmakers ride the growing anti-ESG wave. According to BloombergNEF, 27 conservative-leaning states have deployed a mixture of bills that either restrict their governments from utilizing ESG factors when making investment decisions, or curb investment of state funds with companies that divest from emissions-intensive industries.

BlackRock, in particular, has become the target of GOP scorn as Florida Governor Ron DeSantis said the state would pull $2 billion of investments from the firm and urged managers who run the state’s pension funds to do the same. In contrast, Vanguard quit the world’s largest climate-finance alliance late last year, with Chief Executive Officer Tim Buckley questioning the advantages ESG strategies have over index funds.

The political backlash has “spooked some firms with ESG products from overtly marketing their ESG capabilities,” said EQM Indexes co-founder Jane Edmondson. The change in sentiment “stands as a complete reversal from a few years ago when firms were heavily touting their ESG products and positioning ESG considerations as a source of alpha,” she said.

ESG ETF flows were already pressured by the Federal Reserve’s rapid policy tightening, as such funds tend to be overweight growth and technology stocks. Equity markets tumbled Tuesday after Fed Chair Jerome Powell said officials are ready to speed up the pace of tightening and take rates higher should inflation keep running hot.

To cope with the difficult market environment, sustainable fund issuers have slowed launches and rebrandings from the second half of last year. BI expects this trend to continue given most large managers already own multiple funds and investors fear economic downturn.

The most staunch ESG advocates “were living in a little bit of a fantasy land for a while,” said Eric Balchunas, a senior BI ETF analyst. Though he adds that while every new fledgling category has to go through a bout of skepticism, the ESG theme isn’t going anywhere anytime soon.

“They’re just going to remain fringe,” he said.

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