The money flowing out of funds that invest in companies with environmental, social and governance principles has gone from a trickle to a torrent as investors sour on a sector hit by green-washing concerns, red-state boycotts and boardroom debates.

The investing strategy has become increasingly politicized after being used by companies to address E.S.G. issues among their employees, customers and other stakeholders. In a sign of the times, the phrase has been scrubbed from the World Economic Forum’s official program in Davos, Switzerland, after being on the agenda in previous years.

Investors pulled $5 billion out of E.S.G.-focused “sustainable” investment funds last quarter, according to a new report by Morningstar. The withdrawals came amid a wider market rally at the end of 2023.

For the full year, $13 billion was pulled from E.S.G. funds. All in all, it was the “worst calendar year on record,” wrote Alyssa Stankiewicz, Morningstar’s director of sustainability research.

Even the bulls are changing their narrative. Larry Fink’s BlackRock, a longtime champion of the E.S.G. investment strategy, has grown quieter on the issue as political tensions rise, especially among Republican lawmakers. The brunt of the outflows last year were from a single iShares E.S.G. fund managed by BlackRock.

The E.S.G. market is still worth trillions, attracting a wide swath of investors looking for solid returns and motivated by a cause they believe in. The median return for the larger E.S.G. funds was a decent 20.8 percent last year, according to Morningstar, although that trailed the S&P 500.

But investors’ returns are off their 2021 peak, hurt by rising interest rates and the lack of regulation that would better define which stocks qualify as E.S.G., Morningstar noted. It added that the political heat is also having a chilling effect. Last month, House Republicans stepped up their scrutiny of fund giants such as BlackRock and State Street over their E.S.G. investing strategy.

Wall Street has responded. Fund managers liquidated 16 such funds last quarter and opened seven, the second consecutive quarter in which closures outpaced newcomers.