The politicisation of climate-related investment, particularly among US pension funds, is at the core of the slump in support for ESG funds. This pushback is more pronounced in the US, where it has become a political hot potato in the fight against so-called ‘wokeness’.
Some might see this as an inevitable consequence of the progress already made in embedding climate change policy into the corporate agenda over the last few years. But if the backlash continues to undermine investor confidence in the climate agenda, it could have disastrous consequences for efforts to reach net zero and the whole energy transition.
The ESG 'industry' has a real fight on its hands. ESG has become weaponised, with some US states legislating against its adoption within an investment framework and casting doubt on its efficacy as an investment strategy. Republican politicians are ramping up their anti-ESG lobbying. It is estimated that at least 165 anti-ESG bills were introduced in 2023. Anti-ESG campaigners have created a mood of uncertainty among investors increasingly unsure whether climate-thematic funds can deliver on their promise.
Sustainability proponents must fight this with renewed vigour, or it will have a massive negative impact on the global economy. Above all, opposing ESG activity runs counter to the desire of companies and their investors to actively and effectively managing climate-related risks, which for an investor is a crucial part of their fiduciary duty.
The ESG 'industry' has not helped itself by allowing a proliferation of funds, many of which do not do justice to the label. Pressure on fund managers has intensified around the world, reflecting concerns that for too many funds, an ESG badge is just window dressing. In 2023, Australia’s funds regulator pursued several high-profile enforcement actions for perceived greenwashing, including against Vanguard, alleging misleading claims about ESG exclusionary screens that were applied to its investments.
As a result of all this negative coverage, ESG fund flows appear to have hit a wall. According to Morningstar data, investors have pulled more than $14 billion from US sustainable funds in the past year.
The reaction of the very largest players has been to retreat. In December 2023, Vanguard made the decision to pull out of the Net Zero Asset Managers (NZAM) initiative, launched in late 2020 to encourage fund firms to reach net zero emission targets by 2050.
Potentially worse still, as much as $20 trillion of assets have been removed from the global decarbonisation drive by another three of the world’s largest asset managers, BlackRock, State Street Global Advisors (SSGA) and JP Morgan Asset Management (JPAM) reneging on their sustainability promises.
Following Vanguard's retreat, in mid-February, SSGA and JPAM announced their withdrawal from the Climate Action 100+ initiative. BlackRock also shifted its association with the CA100+ away from its US arm in favour of its international division.
This creates a huge challenge for investors and makes it more difficult to make progress on decarbonisation. Climate change poses the biggest long-term threat to the global economy. If no mitigating action is taken, global temperatures could rise by more than 3°C and the world economy could shrink by 18% in the next 30 years.
Economies in Asia would be hardest hit, with China at risk of losing nearly 24% of its GDP in a severe scenario, while the world’s biggest economy, the US, stands to lose close to 10%, and Europe almost 11%
In Europe and Asia Pacific, at least the mood is not as dark as in the US. There is a growing convergence on ESG regulation and product development. Regulations such as the EU’s Corporate Sustainability Reporting Directive are driving global institutions to reconfigure their operations and minimise their climate commitment liabilities.
This creates several layers of complication for globally invested institutions, having to meet reporting requirements in many different jurisdictions, something the big US institutions are also kicking back against.
For ESG fund promoters, the pushback and negative headlines have resulted in a greater focus on ensuring that investment strategies and processes match the fund label. Providers of capital, in both wholesale and institutional channels, are now much more focused on this due diligence. For their part, investors are looking far more closely at how ESG funds align with their own interests.
There are positive aspects to all this, in keeping ESG funds honest, but the concern is that the anti-ESG lobbying tips over into a major landslip on the drive to decarbonise.
Posted 29 February 2024
