By Suzanne McGee

(Reuters) – Parnassus, one of the largest asset managers offering products tied to environmental, social, or governance considerations, launched its first exchange-traded funds (ETFs) on Thursday amidst a challenging environment for this strategy.

As performance of U.S. ESG funds lags behind broader indexes, investor interest is diminishing. 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 just 595, with some funds closing and others abandoning their ESG mandates.

Certain segments are struggling more than others: Morningstar reported that U.S. climate funds are likely to see their first year of net outflows this year, a trend tracked since 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.

However, Benjamin Allen, CEO of Parnassus, asserts that the 40-year-old firm has weathered other cycles and is focused on selecting high-quality companies that consider environmental and social impacts on long-term returns. The Parnassus website states that comparable mutual funds have posted gains of 17% to 22% 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 be available post-launch. Allen anticipates overlap between the ETFs and similar long-established mutual funds, although each ETF 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).