Will Asset Managers Backtrack on ESG?
When confronted with the risk of losing capital, asset managers downplay their pro-ESG views.
By Asiyah Choudry
November 7, 2022
State legislators have been enacting policies that punish financial institutions for evaluating climate risk as part of the investment process. As a result, asset managers are losing access to capital in certain markets. Let’s take a closer look at how asset managers are responding to state-level withdrawal from climate-conscious investment and why financing climate solutions is more critical than ever.
The rise of anti-ESG legislation
In 2020, the Trump administration proposed the Fair Access rule, which would have required financial institutions to provide financial services to oil and gas companies to “ensure fair access to bank services, capital, and credit." As a result, financial institutions would be restricted from withholding investment based on the consideration of environmental, social, or governance factors. Though the Fair Access rule was abandoned, anti-ESG sentiment has persisted at the state level.
According to Reuters, at least 44 anti-ESG bills have been proposed in 17 states this year, including Texas, West Virginia, and Kentucky. Texas Senate Bills 13 and 19 prohibit government agencies from investing in financial institutions that won’t invest in fossil fuels and firearms, respectively. In August, the Texas comptroller published a list of 10 financial institutions and 348 funds subject to Texas’ provisions because they “boycott energy companies.” (However, it is interesting to note that Texas leads the nation in wind-powered electricity generation, having produced 26% of US wind power in 2021.)
Similarly, West Virginia has created a list of restricted financial institutions, barring five financial institutions from entering into state banking contracts for the same reason. Both lists specifically call out pro-ESG asset management firm BlackRock.
How asset managers are responding
To avoid being targeted, pro-ESG asset managers, such as BlackRock, have claimed that anti-ESG legislation does not apply to their investment activities. In a letter to Republican attorneys general, BlackRock affirmed its commitment to investments in energy firms, including fossil fuels. BlackRock CEO Larry Fink’s most recent letter to CEOs echoes this sentiment, stating “BlackRock does not pursue divestment from oil and gas companies as a policy.” However, this contradicts BlackRock’s climate commitments, including its net zero by 2050 pledge, and is at odds with Fink’s previous statement that “climate risk is investment risk,” spurring investors towards ESG-friendly change.
Without divesting from fossil fuels or supporting portfolio companies in their decarbonization efforts, BlackRock undermines its climate change pledges. Globally, BlackRock is one of the largest investors in coal, funding an estimated $109 billion. Last month, New York comptroller Brad Lander directed a letter to Fink expressing concern that the firm is backtracking on its climate commitments, citing limited support for climate-related shareholder resolutions, among other issues.
State legislation appears to be pushing Fink to reveal his true stance on climate-friendly investment policies.
The problem with fossil fuel financing
The fossil fuel sector is a key emitter that must be targeted if we want to achieve net zero emissions by 2050. In 2020, fossil fuel combustion accounted for 92% of anthropogenic greenhouse gas emissions in the US. Redirecting invested capital from fossil fuels into renewable energy supports the energy transition, moving us closer to net zero. Unfortunately, the issue has become deeply politicized, particularly in the US, making it even more difficult for financial institutions to divest.
Asset managers are facing competing pressures. They risk losing out on state assets for doing “too much” on ESG, as in the case of BlackRock and Texas. At the same time, they are being criticized (rightfully) for failing to do enough about climate change.
The importance of financing climate solutions
The UN IPCC Sixth Assessment Report on Mitigation of Climate Change describes climate finance as a “critical enabling factor to the low carbon transition.” According to the report, the current level of financing supporting climate action is insufficient to mitigate climate change.
Anti-ESG bills further restrict financial flows toward climate solutions. One report estimates that investment in climate solutions must reach $5 trillion/year by 2030 to address the climate crisis, but financial institutions continue to drive emissions by investing trillions into the fossil fuels sector each year.
However, it’s also important to note that ESG isn’t necessarily the solution. Climate progressives, like GreenPortfolio, have long been critical of ESG because of rampant greenwashing and a lack of standardization. For instance, the SPDR® S&P 500® ESG ETF has holdings in fossil fuel companies. Nonetheless, there is a tremendous need for capital to finance climate solutions and ESG has brought greater visibility to this issue.
Beyond ESG: What to look for in an asset manager
When you’re looking for your next investment, consider whether the asset manager’s climate commitments align with its investment practices. Investment managers that backtrack on ESG in order to avoid being penalized by anti-ESG legislation are at risk of greenwashing. We hope to see asset managers remain committed to climate action going forward, despite the increase in negative press associated with climate consciousness.
If you support the low carbon transition, consider voicing your preference for investment products that support climate solutions with your investment manager or local government officials. For the greatest impact, consider investing in climate-friendly ETFs, mutual funds, or bond funds. Impact investing is another investment strategy to consider to create positive environmental and/or social impact in addition to financial returns.
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