The movement against environmental, social and governance investing has had mixed, though generally negative, results for ESG investing strategies in name, if not also in practice, according to experts and asset manager filings.
One of the most prominent examples of the anti-ESG movement’s success is several states moving away from BlackRock Inc. as a manager of their state retirement assets because of the firm’s association with using ESG considerations in its investing. More broadly, several congressional committees and at least 19 state attorneys general have sent letters to other asset managers and proxy advisory firms arguing that their strategies—moving investments away from the fossil fuel industry—may constitute anti-competitive practices.
Certain asset managers, such as State Street, acknowledged in their 2022 10-K annual disclosures that “Our businesses may be adversely affected by increased political and regulatory scrutiny of ESG investing practices.” More recently, BlackRock identified “increasing focus from stakeholders regarding ESG matters” as a risk factor on an 8-K disclosure from January 12.
Alyssa Stankiewicz, an associate director of sustainability research at Morningstar, says “we have definitely seen a weakening demand for ESG strategies,” and 2023 was a “year of pretty significant outflows in sustainable funds in the U.S.”
She cautions however, that much of this outflow is due to performance, not political considerations.
Stankiewicz adds that, “there are many strategies grouped under the ESG umbrella,” and, like all investments, these strategies will produce different results, especially those based on “specialized thematic strategies.”
What’s in a Name?
From May 2022 through December 2023, 16 exchange-traded funds removed ESG mandates, and there has been a slowdown in new ESG fund launches and re-purposes. Half of these 16 funds were managed by one asset manager—Inspire Investing, which changed the name and mandate while sticking to the same essential investing allocations.
According to an Inspire statement in August 2022, it initially adopted the term “faith-based ESG” in 2019 to describe their approach to investing and how it applies a biblical worldview to ESG criteria. More recently, due to activism in favor of ESG, the term has received backlash from conservatives and has become broadly perceived as an environmental approach that pushes out fossil fuel use more than a values-based investment scheme. To reflect this development of public perception, Inspire publicly renounced the ESG label in 2022.
Despite this, according to Inspire, “the investment objectives and methodologies behind the funds are unaffected by this change.”
Stankiewicz notes that these eight funds still prioritize environmental factors and that the “term ESG was the issue,” as opposed to the actual investments.
Voter Impact
Andrew Behar, the CEO of As You Sow, a non-profit advocacy that supports corporate responsibility, believes that the ESG backlash is not seriously affecting investors’ decisions, though it may be changing shareholder voting strategies when it comes to identifying and naming funds and strategies.
Both Vanguard and BlackRock have reported steep declines in support for ESG-related shareholder proposals. BlackRock supported 7% of ESG-related proposals from July 2022 through June 2023, down from 22% in the previous cycle and 47% in the one before that. Similarly, Vanguard supported 2% of ESG proposals from July 2022 through June 2023, but 12% in the previous year.
BlackRock noted, however, that it only supported 9% of total proposals, ESG or not, from July 2022 through June 2023: “Overall, we observed an increase in the number of shareholder proposals that did not warrant BIS support. These often addressed relevant issues but sought simplistic outcomes that overlooked the competing priorities companies were balancing and the complexity and interconnected nature of the issues.”
Vanguard attributed this trend to relaxed SEC rules that make it easier for shareholders to propose corporate resolutions, saying its reduced support for ESG proposals was “driven, in part, by November 2021 changes to SEC guidance” on such proposals.
No matter the driver, CEO Behar does not see investing strategies changing, just naming conventions. At the end of the day, he says “ESG is a framework for assessing and addressing risk,” and investors are not going to abandon this framework, even if some changes around naming are made.
Tags: BlackRock, ESG, State Street, Vanguard