The troubled environmental, social, and governance (ESG) investment sector has been hit from all sides this year, most recently by $8 trillion asset manager BlackRock and other investment firms in oil and gas. There have been Republican-led attacks that it accuses of hostility against the sector.
The problem with ESG as an investment approach is the lack of standardized criteria that make investments sustainable. ESG approaches deliver ostensibly innocent returns. For example, exclude fossil fuels and defense investments, or prioritize sectors such as green energy. But in reality, it can refer to any strategy that has a vaguely defined positive impact anywhere in the world.
For example, a recent paper by researchers at MIT and the University of Zurich found little consistency in the ratings of ESG rating agencies, making it difficult to assess the ESG performance of companies, funds and portfolios.
“This is confusing for companies and investors. There are so many different standards being imposed on them,” said former sustainability head of DWS, Deutsche Bank’s wealth management arm. says Desiree Fixler, a whistleblower and ESG adviser to the UK’s Financial Conduct Authority.
criticism on both ends
The term ESG was first coined in 2004, but has created a feverish frenzy in the financial sector over the past few years. The heat peaked at last year’s United Nations Climate Change Conference, highlighting green finance as a key tool in the fight against climate change. Since then it has lost some of its luster.
Growth in ESG investment products in 2021 has outpaced all other segments of the asset management industry. Global sustainable fund assets reached $2.97 trillion last year, according to Morningstar, but he fell to $2.24 trillion at the end of September.
The anti-ESG movement originated in the red heartland of the United States. Florida Governor Ron DeSantis is one of those who denounce “awake” asset managers like BlackRock, even though he remains a major financier of the fossil fuel industry. Republican officials in Florida, West Virginia, Texas, Louisiana and Missouri have already sold billions of dollars from BlackRock funds as part of the protests. Anti-ESG bills are planned in at least 15 states next year, and House Republicans plan to continue their battle in Congress.
At the other end of the spectrum, ESG investing faces criticism of greenwashing. BlackRock, Vanguard and other asset managers have been accused of watering down their ESG efforts.
BlackRock voted for less than a quarter of U.S. shareholder proposals on environmental and social issues during this year’s annual shareholder meeting season, saying such proposals have become too prescriptive. [companies’] financial performance. ”
Asset manager Vanguard recently pulled out of the Net Zero Asset Managers Initiative, the world’s largest climate finance group.
A 2021 Greenpeace study found that sustainability-focused funds in Luxembourg and Switzerland devote slightly more capital to sustainable activities than traditional funds. The Net Zero Asset Managers Initiative at the time had $550 billion in combined coal, oil and gas companies with new projects planned.
“A topic that is safe to exaggerate”
The lack of standardized rules around ESG investing allows marketing departments to overstate a company’s climate beliefs without actually making a big difference.
However, this trend is now being challenged. After being fired from his position as chief of DWS Sustainability, Fixler filed a whistleblower complaint against the company for allegedly making misleading statements about his ESG investments. The company denies the allegations. Across the financial sector, she said, companies’ huge climate claims stem from the assumption that ESG is a “safe topic to exaggerate”.
“It’s ambitious, so many executives felt, ‘We’re all trying to do good here,’ when it comes to impact and ESG,” says Fixler. “‘We are all trying to make the world a better place.'”
Fixler points to police raids on the offices of asset managers DWS and Deutsche Bank earlier this year as an expired “calculation day” for the sector. She likens it to her dot-com bubble before it burst.
It’s not just EU regulators taking action. In the US, Goldman Sachs said in November that he paid a $4 million fine for failing to comply with ESG’s policies and procedures. In May, BNY Mellon paid him $1.5 million for “misrepresentations and omissions” regarding ESG-related claims. These cases, driven by the newly formed SEC ESG Task Force, indicate that a major crackdown may be on the horizon.
Following increased scrutiny by regulators, top European asset managers such as Amundi and Axa, as well as New York-based BlackRock, were previously listed as having the highest levels of sustainability ESG. Downgraded the fund to a category with stricter criteria.
“I think a lot of these issues are a result of the fact that we use the ESG acronym in different ways,” says Alison Taylor, executive director of Ethical Systems at the NYU Stern School of Business. says Mr.
stronger rules, definitions
The UK and EU are leading the way in tightening rules for ESG rating agencies.
But Taylor says transparency and data alone are not enough to solve some of the problems facing the industry. Fund managers argue that environmental impact data is the easiest to quantify. But even taking seemingly simple measures, such as the amount of water Coca-Cola uses, requires complex judgments about its environmental impact. “You mean the water that goes into Coca-Cola?” Taylor asks. “The water used to grow the sugar? The water used in the manufacturing process? The water used to make the plastic bottles?”
Taylor predicts that the ESG acronym will not persist, and instead will emerge with differentiated investment strategies focused on either the ‘E’, ‘S’ or ‘G’. There are some examples where different areas overlap, but there are also areas where what’s good for one category isn’t necessarily useful for another.
This is an argument used by BlackRock and several other investment firms against fossil fuel divestments in light of Russia’s war on Ukraine. Europe must turn to fossil fuels in the short term to reduce its dependence on Russian gas and achieve energy security, they say: Contrasting the ‘E’ with the ‘S’. Rising oil and gas prices could also be a factor, given the company’s commitment to long-term economic returns.
There is a renewed emphasis among investment firms on polluter engagements rather than outright divestments, and on so-called transitional energy sources such as natural gas in addition to renewables (the latter of which has been recently controversial). strengthened by the European Union’s decision to classify natural gas). green investment).
Despite this year’s setback, industry watchers say greenwashing accusations will ultimately force companies to be bolder and more transparent in their climate commitments.BlackRock and Vanguard Rhetoric on Climate Some even say that diluting GDP could be a boon for the sector.
Ken Packer, a senior lecturer at Tufts University’s Fletcher School, said, “We hope Vanguard’s decision sheds light on the divide between many asset managers and banks. It has a heavy-use consortium and an unaltered mission to provide a return on investment.”
While the Republican backlash and the conflict between Russia and Ukraine have affected the sector this year, Fixler sees macro trends in government policies like the U.S. Inflation Reduction Act as the ethos of ESG takes hold. It is listed as a sign that
“To say that this is just the latest acronym is shallow and clichéd. In a few years it will all be over and we will all be turning to the cyber or metaverse,” Taylor agreed. increase. “It may be so, but I think our expectations of the role of business in society are changing.”