Opposition to ESG gains clout to force banks to change, but they may not be giving up easily

Over the course of several years, environment, social and governance (ESG) went from an obscure activist movement committed to integrating social responsibility into the world of investing to a widely known investment craze that grew exponentially.

In March 2018, according to the Energy Policy Research Foundation, global ESG funds had $600 billion in assets under management. By December 2023, based on Morningstar data, that was up to $3 trillion, implying an annualized growth of nearly 31%.

According to the accounting firm PWC, $18.4 trillion of the global $127.5 trillion in assets under management are described as ESG funds.

While those assets have grown, so has the backlash against the movement. States have responded with a barrage of legislation that restricts the use of ESG factors or targets entities that boycott certain industries.

Financial institutions are reacting to these state-level actions with what appears to be a retreat from their commitment to ESG, but there are questions if they are changing or just regrouping the efforts under new names.

Coalition effort

It’s difficult to pin down exactly how many states have banned dedicating state money into ESG funds. For example, Texas has adopted several laws that target entities that boycott certain industries, according to the law firm Ropes and Gray, but in 2021, the Teacher Retirement System of Texas adopted a policy that directs its Investment Division to consider ESG factors that are material to long-term returns and levels of risk.

All but nine states have passed some form of legislation that restricts the use of ESG factors in one area or another, and 13 have some form of legislation that promotes ESG factors in investment and/or proxy voting decisions. Seven states have affirmatively not restricted the use of ESG factors.  

“We have joined together in a coalition effort to push back on this,” West Virginia Riley Moore told Just The News.

When West Virginia passed a law in 2022 that authorized the state to bar institutions with anti-fossil fuel policies from entering into banking contracts with the state, Moore sent letters to six institutions warning them they could end up on the state’s restricted institutions list.

Ultimately, five were added to the list, as U.S. Bancorp, according to a statement from Moore’s office, had demonstrated that it had eliminated policies against financing coal mining, coal power, and pipeline construction activities from its “environmental and social risk” policy.

In February, Moore sent letters to six more institutions, warning them they could be added to the list. Earlier this month, Moore announced that only four of those notified were being restricted. Fifth Third Bancorp, which has $35 million in assets under management (AUM), and BMO Bank, which has $1.3 trillion in AUM, demonstrated that they were not boycotting fossil fuel companies and were kept off the list.

BMO Bank had removed from its website a statement that it is restricting lending to the coal industry. Bloomberg News reported that Timothy Cox, the bank’s U.S. general counsel, had written to Moore’s office, saying that the website did not reflect BMO’s current policies. “After receipt of your letter, we realized that a cached version of the statement remained on our websites and took it down. We have no plans to republish the Coal Statement,” Cox’s letter stated.

“Why is BMO so worried about getting on my list? If they get on my list, they could end up on multiple other states’ lists,” Moore said in an interview.

Moore said that West Virginia was the first state to put out a restricted financial institution list, and he was the first elected official in the country to divest taxpayer dollars from BlackRock.

In March, the Texas Board of Education decided to divest $8.5 billion in assets from BlackRock, which has $10 trillion in AUM.

The board’s chairman, Aaron Kinsey, told Just The News in March that the company’s leadership in ESG “immeasurably” damages the Texas’ fossil fuel industry. The actions of the Texas Board of Education, and those in other states, have caught the company’s attention. A company spokesperson said that the company invests in Texas’ energy sector, including $550 million in a joint venture with Occidental, an oil company.

Collapsing

Writing in Forbes, Tilak Doshi, an energy economist, explains that the last two years haven’t been good for the ESG world. Besides the political backlash, there’s been a diminishing commitment to ESG in the financial world.

Wind and solar energy stocks collapsed in 2023, Doshi noted, and the discussion at the annual CERAWeek, a global energy conference, had for the past two years included speeches from many participants in the oil and gas industry who openly challenged the possibility of reaching net zero emissions by 2050. Oil companies BP and Shell have also revised their climate targets. Elections in Europe and the U.S., Doshi wrote, may take turns to the right, which will have ramifications for the future of ESG.

Wall Street Journal reporter Jon Sindreu wrote last month that a number of markers show the investment craze is losing its luster. Based on an analysis of quarterly data from Morningstar, Sindreu said that the percentage of newly created funds in the U.S. and Europe with ESG in their name fell from a peak of 8.3% to 3.3% last year. Online searches for “ESG investing” have also plummeted.

Morningstar also noted that "on an overall basis and across the three largest asset classes, ESG funds have consistently ranked around the middle of their peer groups—sometimes a bit below the middle, sometimes a bit above, but never dramatically worse." 

The stocks most associated with ESG, which includes renewable energy and electric vehicles, are falling. Since the start of 2024, investors have pulled $2.2 billion from funds dedicated to decarbonization efforts.

Sindreu argues that “sustainable investing,” as ESG is sometimes called, is “a broad tent covering too many interests.” While it’s not disappearing, he wrote, it’s not serving those interests well.

Transition investing

How much believers in ESG are reconsidering its financial and political value, as opposed to finding other ways to advance it, is unclear.

The Wall Street Journal reported last month that Mark Wiedman, head of global client business at BlackRock and a candidate to succeed Fink, suggested a new name for ESG. “Transition investing is specific and concrete. ESG as a category is a vague grab bag for many clients,” Wiedman said.

The company is investing billions in renewable energy infrastructure funds, which invest in solar power, natural gas made from food waste and cow manure, and carbon removal projects, the Journal reported. These differ from ESG strategies that avoid fossil-fuel projects, which only end up being purchased from competitors.

Alex Stevens, manager of policy and communications for the Institute for Energy Research, told Just The News that this strategy is ESG by another name. “There's definitely a rebranding effort underway,” Stevens said.

The companies that embraced ESG, Stevens explained, were setting themselves up for a backlash by making it overtly political. “Once you've politicized something, everyone's gonna look for angles to sort of attack it from different perspectives,” he said.

In BlackRock’s latest earnings call, a seemingly angry Fink didn’t seem to think the company’s critics were being fair. He said they are making decisions based on “lies” and “misinformation,” but he said, as a leader, the institution could expect to be targeted.  

“As a fiduciary, politics should never outweigh performance. I do believe that with the vast majority of our clients, our long-term fiduciary approach and performance are resonating,” Fink said.

For the time being, it would appear BlackRock is maintaining its present course, and as a leader in the investing world, other companies will be watching how the company proceeds in the midst of so much pushback.