What’s Behind The ESG Investment Backlash

In the US, the past couple of years have been a topsy-turvy time for investment aiming to improve environmental, social, and governance (ESG) outcomes. This kind of investment, which tries to combine financial returns with social good, is utterly commonplace, especially in Europe. In recent years, discussion has generally focused on how to measure and implement it better amid rampant greenwashing and dodgy metrics – not on whether this practice is worthwhile at all.

After all, ESG concerns are financial concerns. And climate hazards are particularly urgent. “Look, there is more and more data that says that climate change is a real risk,” says Gregory Hershman, the head of US policy for Principles of Responsible Investment (PRI), a non-partisan investment initiative affiliated with the UN. “An investment manager has a fiduciary duty to consider that risk.”

Yet right-wing forces in the US have been using a variety of political tools in an effort to undercut investment managers’ ability to account for such risks.

These political attacks haven’t been on technical grounds, according to Hershman. “We’re deep into conversations of what does it mean to be a…sustainable investor and seek sustainable returns for your clients. And so it’s frustrating, the timing.”

The environmental organization Sierra Club has called the war on ESG the latest form of climate denialism. Diana Best, a senior finance strategist for the climate campaign network Sunrise Project, agrees. “It’s not even about ESG. It’s about using some political term that can be twisted and manipulated,” Best argues. She calls it “an attempt to punish companies that are taking any kind of principled stance,” drawing on the same playbook that the right wing has previously used to drum up controversy around seemingly niche issues.

A Republican-controlled House of Representatives may step up the hostility to ESG investing. But thus far, much of the backlash has been happening at the state level. While some states have passed laws supporting ESG investment, officials in other states, including attorneys general and treasurers, have publicly condemned socially and environmentally responsible investing.

In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world’s largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far.

These attacks have been coordinated. An investigation by the New York Times and the investigative journalism outfit Documented found that the State Financial Officers Foundation (SFOF), a political advocacy group funded by climate deniers and dark-money groups, began prioritizing specifically anti-ESG work in 2021 “by weaponizing state treasurers’ offices to advance an anti-climate agenda.” This included calls to boycott BlackRock.

While state treasurers and comptrollers may be little known to the public, the crusade against ESG has some higher-profile figureheads. Both Florida governor Ron DeSantis and former vice-president Mike Pence are among the Republican contenders for the next presidential election, and both have hitched their wagons to the fight against ESG.

However, the Republican Party doesn’t hold a uniform position on this. There are rifts within the party over whether to interfere with asset managers’ decisions to take ESG into account.

When it comes to the general public, ESG isn’t exactly a household term. After learning about this practice, most rank-and-file Republicans are actually in favor of ESG-enabled investment. One study by Penn State University and the communications firm ROKK Solutions found that 70% of registered Republicans surveyed opposed government interference in ESG investments. This was even higher than the proportion of Democrats with the same position (57%).

In other words, although certain Republican leaders are attempting to fold ESG investing into their ongoing culture war, Republican voters are even less likely than Democrats to support this.

However, their reasons tend to be different. Democrats are more likely to oppose ESG investment limits out of benefits to society, while Republicans are more motivated by free-market principles.

This exposes an irony at the heart of the ESG culture war: right-wing critics are seeking to actively interfere in decisions made by investment professionals about how to safeguard their clients’ money. In another context, they’d be up in arms about the very thing they’re doing here.

And some research does suggest that muzzling ESG activity is causing financial losses – again, which should be contrary to conservative financial principles. A University of Pennsylvania study looked at Texas legislation that came into effect in September 2021, which banned cities from having their funds managed by companies whose policies restricted investment in fossil fuels and weapons. Several banks then left the market, and city officials had fewer choices of investment management.

The analysis of the first eight months of the law’s implementation suggested that it substantially increased borrowing costs: cities in Texas will pay between $303 million and $532 million extra in interest.

Another irony is that the companies condemned for being too woke aren’t even doing all that much to promote so-called wokeness. BlackRock remains the world’s biggest investor in fossil fuels. The world’s largest investment companies also retain major holdings in meat and dairy companies, Zambia’s ruinous debt, and weapons makers, to give a few examples. The Sunrise Project is also concerned about neglect of Indigenous rights, for instance when investments support companies operating in Indigenous territories without community permission.

When it comes to doing too much or too little on ESG, “they’re kind of getting yelled at from both sides,” says PRI’s Hershman.

It’s simplistic to pin too much weight on a single person, but the dramatic trajectory of ESG investment is epitomized by Larry Fink, the CEO of BlackRock. Fink’s landmark 2020 and 2021 letters to CEOs called on the financial industry to act against climate change, positioning BlackRock as a leader in this space. The letters arguably sparked both a wave of climate-conscious investing and, conversely, intense lobbying from polluter-aligned interests.

While building up BlackRock’s leadership in this space, Fink didn’t imagine it would spark a backlash from the right. Several years later, though, he was more world-weary.

At the World Economic Forum earlier in January 2023, Fink described the right-wing attacks on this kind of investment: “The narrative is ugly. The narrative has created this huge polarization…For the first time in my professional career, attacks are now personal. They’re trying to demonize the issues.”

Best says these personal attacks, including a mobile billboard of Fink’s face, were noticed. “What we witnessed at BlackRock’s Big Problem [a campaign network urging more climate responsibility from BlackRock] was a definite chilling effect inside of Black Rock,” Best comments. “They went from being ‘We want to be at the very forefront of the pack,’ sort of carving the way on this, to in 2022, after sustained attacks from the right, basically backpedaling…You sort of saw this rolling back, a little bit, of their rhetoric at least.”

(BlackRock did not provide comments for this story.)

Roberta Giordano, a finance campaigner for the Sunrise Project, contrasts BlackRock with Vanguard, the second largest asset manager. “What we’ve seen over the last couple of years is that Vanguard and its leadership is drastically different from BlackRock,” Giordano says. “They’ve tried their hardest to always remain in a neutral position.”

According to Giordano, when Vanguard realized that these efforts to remain neutral weren’t working, it left the Net Zero Asset Manager initiative (NZAM), even though its commitments under NZAM fell short of its peers’. “It was very clear to us that that was an effort by Vanguard to neutralize those attacks,” Giordano says.

Vanguard has even been accused of censoring a climate campaign website on employees’ devices.

(The company did not respond to this point. More broadly, Vanguard said in a statement, “As an investor-owned asset manager, Vanguard is singularly focused on maximizing our clients’ returns and giving them the best chance for investment success. As we’ve long maintained, our approach to climate risk is about safeguarding investor returns. Climate change along with the resulting global response is having far-reaching economic consequences for companies and financial markets, and therefore for investors. As a result, climate risk is a material financial risk for certain companies and their shareholders’ long-term financial success.”)

Overall, there are indeed some indications that companies are paying attention to the political headwinds. The big asset managers are increasingly voting against ESG-related shareholder resolutions. And the argument from the anti-ESG brigade that ESG investing violates antitrust rules has had an influence. Antitrust concerns recently caused the Glasgow Financial Alliance for Net Zero to reverse a policy about its members phasing out fossil fuels.

But the amount of money divested by the anti-ESG folks remains trivial in comparison. And Best believes that the pendulum is starting to swing back.

Some asset management firms are resisting the anti-ESG bluster. Best points to Federated Hermes as an example. The company used to be a platinum sponsor of the ESG-attacking group SFOF, but following internal as well as external pressure pointing out the inconsistency with its climate messaging, dropped this support.

While the ESG backlash may be a bump in the road now, it’s unlikely to derail the overall path.

Hershman points out that younger people, who are just starting to save for retirement or make investments, are increasingly asking about the content of the investments. “I think that trend is just going to continue growing.”

Best agrees, saying, “There is some recognition that asset managers have to take a position.” While the politics may be a distraction, ultimately, “What we really need is a firm and consistent approach from asset managers that squarely puts climate risk management at the center of their business strategy.”