Interview

ESG Backlash “Understandable, but Misguided”

‘Anti-woke’ efforts to prevent investors considering ESG factors are self-defeating, argues Nathan Fabian, Chief Responsible Investment Officer at the Principles for Responsible Investment.

The world’s largest asset manager has been forced to defend its membership of climate change initiatives in the wake of increasing ‘anti-ESG’ sentiment in some quarters of the US investor community.

BlackRock’s Head of External relations, Dalia Blass, has responded to a letter sent to CEO Larry Fink on 23 August signed by 19 attorney generals – nine of which represent states that are among the biggest consumers of fossil fuels in the US – accusing BlackRock of “sacrificing” pension fund members’ returns to “satisfy [the asset manager’s] own climate agenda]”.

The letter claims: “BlackRock appears to use the hard-earned money of our states’ citizens to circumvent the best possible return on investment, as well as their vote. BlackRock’s past public commitments indicate that it has used citizens’ assets to pressure companies to comply with international agreements such as the Paris Agreement that force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.”

In a response seen by Reuters dated 6 September, Blass tells investors that participation in ESG-initiatives including Climate Action 100+ are consistent with delivering the best returns since they focus on mitigate climate risk.

Blass says the asset manager does not coordinate its votes or investment decisions with external groups or organisations and adds that she is “disturbed by the emerging trend of political initiatives that sacrifice pension plans’ access to high-quality investments and thereby jeopardise pensioners’ financial returns”.

“Burdensome and unnecessary”

This ‘emerging trend’ includes a decision last month to adopt Governor Ron deSantis’ proposal banning social, political or ideological interests from influencing investment decisions.

The State Board of Administration passed a resolution to disregard ESG factors in its investment management practices; and when exercising shareholder rights and voting proxies, to act “for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of the Florida Retirement System Defined Benefit Pension Plan”.

Meanwhile this June, Texas Attorney General Ken Paxton –also a signatory of the BlackRock letter – wrote to the US Securities and Exchange Commission (SEC) opposing a proposition to introduce enhanced standardised climate-related disclosures for investors.

“The SEC’s proposed rule attempts to impose a host of burdensome and unnecessary climate-related disclosures that flagrantly exceed the SEC’s delegated role of ensuring capital markets continue to function and that investors are provided timely, accurate and material information,” Paxton claimed.

Seventeen US states have blacklisted financial organisations they believe are opposed to either fossil fuel, energy or firearms companies.

Some aspects of this anti-ESG activity come as a surprise to Nathan Fabian, Chief Responsible Investment Officer at the UN-backed Principles for Responsible Investment. While welcoming any analysis of ESG investing, he questions the rigour of some critiques.

“The financial industry is based on a culture of inquiry, exploration and trying to define where the value is, and ESG is rightly part of that culture and process. So, while scrutiny is welcome, some of the critiques of ESG have been superficial. [Detractors] are asking good questions, but maybe we’re not getting to the substance of the real issues on which we should be focussing.”

He adds: “I find it surprising that any responsible politician would try and regulate against free thought and analysis which would ultimately try and constrain investors from making good judgments that serve the best financial interests of beneficiaries.”

Fabian argues that eliminating ESG factors from investment decision-making might amount to “anti-fiduciary responsibility” since failure to understand a company’s impact on the environment and society could impact negatively on long-term returns to investors.

“Investors are seeing how the world is changing, and they are fulfilling their fiduciary responsibility to assess the changes and to try and invest through these trends and cycles. Using an ESG framework helps provide insights on where the changes might come from and how severe or disruptive they might be. This drives responses to support activities and policies and company behaviour that might address some of the challenges. This is basic, prudent, responsible investing.”

Blaming the tools

While he opposes the kind of anti-ESG legislation being enacted and considered in some US states, Fabian does understand its motivation. The vast majority of ESG opposition comes from states highly dependent on fossil fuels.

Fabian says he appreciates the importance of politicians defending industries and business that are critical to the long-term prosperity of the constituents they represent.

“We shouldn’t pretend that transition is going to be easy. There’s going to be pain points and so this kind of political response to the impacts on some sectors and people is understandable.”

However, he calls efforts to drive ESG away altogether “misguided”.

“Eliminating ESG from the discussion doesn’t change the environmental and social factors that exist. We have inequities in our social systems which cause changes in markets. In turn this changes regulation which then changes what companies can do and therefore it will change what investors can invest in and the returns they make.”

Fabian, also Chairperson of the European Platform on Sustainable Finance, describes the anti-ESG movement as a “political storm” and calls on investors to stay the course, particularly during the current challenging economic and geopolitical conditions.

“ESG is an important tool that helps us navigate quite challenging economic environments. Discarding a tool that’s useful is kind of nonsense. It’s rather like bad tradesperson blaming their tools.”

Fabian also notes the possible unintended consequences that might come from banning ESG factors from investment decision-making.

“The irony is that a ban [on ESG] is basically a capital strike on those investors who are usually better informed. They have done their due diligence and understand economic transition, and if you ask them, most of them would like to allocate capital to the companies most affected by the transition [to net zero] to help them make it successful.

“Making it harder for investors to use ESG as a tool makes it ultimately harder to invest in the companies [anti-ESG proponents] believe they are protecting.”

Counter action

Political sentiment on ESG, and in particular climate-related policy, is far from uniform in the US, however.

California looks set to pass the Corporate Accountability Act which would require US businesses with total annual revenues exceeding US $1 billion dollars to disclose Scope 1, 2 and 3 emissions. The requirements would start in 2025.

While in New York Assembly Bill A3852 is passing through statute which would require fashion retail sellers and manufacturers to disclose environmental and social due diligence policies.

Fabian says: “Those kinds of policy interventions matter because markets work better at scale and when you have comparability backed by verified data. Regulators are the ones in the financial system who ensure that everyone knows what to ask or which data point they’re disclosing against, and demand [companies] provide that information.”

Countering Attorney General Paxton’s point that financial regulators are “acting outside [their] authority and expertise” by implement ESG-regulations, Fabian says such rules are a “basic market function”.

“We need regulators to step in and standardise and allow scaling which leads to the rapid deployment of capital. This is not political philosophy. This is basic market function which is responding to the world we are living in.”

Given recent predictions that there is 50% chance that the world will surpass the 1.5°C increase in temperatures at some point in the next five years, Fabian predicts investors – and legislators – will need to be pragmatic and flexible in their transition plans.

“The key issue is how to convert net zero ambitions and commitments into tangible action when we know that we’re going to have some warming overshoot in the middle of the century. Those investors who have made commitments and who are doing the technical work need our support. That is coming through the Net Zero Asset Owners Alliance, the Net Zero Asset Managers initiative and through the new UN high level expert group that has been convened on net zero guidelines.”

He continues: “Investors are prepared to align and set targets and manage through transition. That’s the behaviour we want, but there needs to be a better understanding when forces outside their control put pressure on them, like wars for example. As long as [companies and investors] always reconcile their plans, and they’re always transparent and accurate about what they’re doing, then we can judge them fairly.”

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