Green Finance Briefing: GOP vs ESG – The Empire strikes back
- Republicans continue to flex their muscles against ESG, targeting the world's largest asset management firms saying that they're using their stakes in public companies to cast proxy votes that favor a "liberal political agenda".
- Despite all these challenges, it doesn't look like ESG is going anywhere anytime soon.
Republicans continue to flex their muscles against ESG, targeting the world's largest asset management firms, arguing that they aren't actually passive investors because they're trying to shape companies' climate or social policies.
GOP representatives in the Banking Committee took aim at BlackRock, State Street and Vanguard, saying that they're using their stakes in public companies to cast proxy votes that favor a "liberal political agenda".
Republicans are also eyeing a potential violation of antitrust laws, pointing to a "coordinated behavior" to advance ESG goals and punish other industries.
"Woke corporations are collectively adopting and imposing progressive policy goals that American consumers do not want or do not need," according to a letter from senior Republicans.
In an attempt to turn rhetoric into reality, the GOP shows no signs of stopping its anti-ESG movement, in what is shaping up to be a looming political combat in the Senate when Republicans take control of the House of Representatives next month.
ESG funds have attracted more than $1 trillion over the past few years, and 2021 was deemed the year of ESG investing. Reports were even showing that ESG-mandated assets were on track to represent half of all professionally managed assets globally by 2024.
The surge in ESG labels for assets in a market with little regulatory oversight and inconsistencies between labeling methodologies sparked valid skepticism around their actual links to sustainability.
While the general consensus is that ESG still has a long way to go, Republicans want it abolished altogether. Critics argue that ESG factors don't affect firm value, or that having positive externalities on society comes at a cost to investors. This is misguided cynicism, according to portfolio manager Levi Zurbrugg.
"Cynics suggest ESG investors don’t care about returns and fail to substantiate how ESG relates to financial performance or risk. This ignores the preponderance of work done by nongovernmental organizations, academics and practitioners, which links ESG issues to the fundamental inputs (cash flows, growth and discount rate) of valuation," he argued.
The political pushback paired with the lack of clarity around ESG has influenced banks and FIs to adopt a more cautious approach towards climate strategies, wanting to steer clear of any legal troubles.
Companies, investors and asset managers now find themselves in legal jeopardy from several directions, making it hard to come up with a coherent strategy or workable business plan, argues the FT.
On the left, federal regulators and Democratic state officials have been demanding more detailed disclosures, as unsubstantiated ESG targets could be interpreted as misleading statements towards investors, and open the door for potential litigation.
“Climate change is likely to become the ESG theme where the crackdown on greenwashing will be the hardest, given that it represents a theme where scientific knowledge is widely available and points to the need for bolder and faster action,” according to JP Morgan Chase analyst Jean-Xavier Hecker.
Hecker expects anti-greenwashing actions to go beyond disclosures to also include an assessment of the alignment between the fund’s stated investment philosophy and the final investment decisions.
But the right also wants to bring the fight to court, probing whether big banks that pledge to cut their carbon footprint are violating antitrust laws.
Here to stay
Despite all these challenges, it doesn't look like ESG is going anywhere anytime soon.
A survey of 550 Bloomberg Terminal users found that more than 60% expect ESG to be either standard or increasingly critical to running a business. The remaining 40% believe ESG is just a “fad.”
However, more than half of survey respondents said they were taking action on ESG because it’s crucial to boosting corporate profits versus actually having a positive impact on society and reducing carbon emissions. Around two thirds said they were acting on ESG at the behest of their clients and primarily to protect their companies’ reputations.
Just look at the charts
Global sales of sustainable bonds — including green, social, sustainability and sustainability-linked bonds — are down 30% this year, according to Bloomberg.
This would mark the first yearly decrease in ESG bond sales, as borrowers dial back from bond issuance globally. Despite the drop, the overall trend is expected to continue upwards in the next few years as companies capitalize on investor demand for ESG-linked investments to fund their sustainability efforts.
What we’re writing
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What you need to know
TreeCard, a climate-conscious digital money app, raised $23 million from investors including Peter Thiel’s Valar Ventures, EQT and World Fund.
Florida will replace BlackRock as the manager of $2bn in state Treasury funds, part of a spreading Republican backlash against sustainable investing.
London-based Bluebell, an activist fund with around $250 million in assets under management that holds a tiny stake in BlackRock, is concerned about "the gap between what BlackRock consistently says on ESG and what they actually do."
Vanguard is walking out of the world’s largest climate-finance alliance, marking the coalition’s biggest defection to date as US Republicans step up their threats against firms deemed hostile toward the fossil-fuel industry.
The GOP’s opposition to meaningful climate policy is increasingly at odds with corporate pragmatism.
In navigating anti-ESG media, it’s valuable to separate well-founded criticisms from misguided cynicisms.