Cracks are starting to appear in the Environmental, Social, and Governance (ESG) investment movement. This may have been inevitable, considering vested interests in the old ways of doing business. But there may be other, more cogent reasons why ESG, practically at least, is running into difficulties.
Three years ago, a couple of months into the Covid-19 pandemic, in an article supported by credible research, I argued that companies with high ESG scores would likely prove resilient during the pandemic and were more likely than those with low ESG scores to come out stronger on the other side.
It’s not evident that that came to pass, due in part, to central bank interventions, which tended to raise all boats on the tide of easy money.
More concerning is that there has been a post-Covid ESG backlash which, though relatively confined, may gather momentum and begin to undermine the good that has come from ESG so far.
ESG, to remind you again, stands for “environmental, social and governance”. It refers to criteria used to assess a company’s business practices and sustainability, and forms part of a broader movement – shareholder activism – whereby investors are having a bigger say in how companies are run.
At the forefront of shareholder activism is the biggest investor in the world, BlackRock, which has a mind-boggling $8.5 trillion in assets under management. With its enormous shareholder clout, BlackRock has been hugely influential in companies adopting better business practices, including cutting carbon emissions.
BlackRock is not a charity; its motives are profit-centred, as are those of other ESG-focused asset managers. They believe that companies that score highly on ESG factors are better positioned for sustainable growth and therefore offer better long-term prospects for investors. It’s difficult to fault this reasoning.
Last week, Larry Fink, CEO of BlackRock, said he would stop using the term ESG because it had become “too politicised”, having been “weaponised by both the far left and the far right”. He also said he was “ashamed of being part of this conversation”. Earlier this year, he reported that BlackRock had lost about $4 billion in managed assets because of anti-ESG sentiment.
This came after the Republican governor of Florida, US presidential hopeful Ron DeSantis, passed legislation banning ESG considerations in state contracts and after the Florida State Board of Administration withdrew the state’s pension investments from BlackRock.
The insurance industry has also seen an about turn. Reuters reported in June that the UN-backed Net-Zero Insurance Alliance, formed in 2019 to get insurers to commit to reducing greenhouse gas emissions in their underwriting portfolios to a net-zero level by 2050, had lost 12 of 28 members in recent months, including the famous Lloyds of London.
ESG in practice
Practically, ESG has had its difficulties. “Green washing” is probably the most prominent of these: it is where a company superficially espouses ESG principles as a marketing strategy to attract a younger, more socially and environmentally minded generation of investors, while failing to change fundamentally.
The problem is that ESG is largely a tick-box exercise that often fails to penetrate a company’s ethos.
In the article “ESGs: Invest with Caution” for the George Gibbs Center for Economic Prosperity in the US, Chloe Kauffman and Mason Robinson point out that ESG ratings are often not reliable. They give the example of a company whose ESG score had not been affected by the collapse of a dam it had built in Laos, which displaced thousands of people and killed at least 70.
Although questions around the practical implementation of ESG may be justified, the backlash against shareholder activism, also referred to as “active ownership”, is concerning.
In a recent presentation by Schroders, the London-based asset manager that is very active in this space, Kimberley Lewis, head of active ownership at Schroders, said there had been an uptick in anti-ESG sentiment in its shareholder engagements, although this was mainly confined to American companies. She said although the volume of environmental and social shareholder resolutions had increased, support for them had dropped, with less than 5% being passed in 2023 thus far. Schroders has also seen a rise in specifically anti-ESG shareholder resolutions. She said it remained to be seen whether or not the anti-ESG trend would gain momentum.
Anti-ESG, anti-activist sentiment among right-wing Americans has been fuelled by the circulation of a 2017 video in which Fink said companies should be forced to change their behaviour.
BlackRock has come out saying Fink’s words were taken out of context, but it’s hard to deny that forcing companies to change is exactly what shareholder activism is all about. This is where business and politics meet.
Fink has also been reported as saying that dropping references to ESG would not change BlackRock's stance. “The firm will continue to talk to companies it has stakes in about decarbonisation, corporate governance, and social issues to be addressed,” he said, according to Reuters.
He appears to be taking the “non-aligned” route. Sound familiar?.
*Hesse is the former editor of Personal Finance