The rise and fall of ESG investing

One of the things that differentiates the progressives of this era from their collectivist forebears is the creativity they have shown in making market actors work against their own interests.

The best example is the ESG movement, which pushed big investors and money management firms to consider progressive environmental responsibility, social justice issues and corporate governance policies when making investments and voting shares at stockholder meetings.

This is a legitimate, if not necessarily successful, investment strategy for the individual investor. Still, it creates conflicts for large asset managers such as BlackRock, Vanguard and State Street which — until the onset of the Biden administration, at least — the law and convention dictated should consider only the need to generate the maximum return on investment possible for their clients when making investment decisions.

No one is quite sure when, but at some point, say Wall Streeters, some of these firms’ larger clients, including individual government employee union pension funds, began pushing the firms that managed their money to consider what they call “corporate social responsibility” when making investment choices and casting proxy votes at shareholder meetings.

For a while, it worked. The trend toward ESG investing was praised as a marriage of the marketplace and corporate responsibility. As a public relations ploy, it was magnificent. As an investment strategy, the data quickly showed it was less than impressive.

Eventually, investors pushed back. In a significant win for the American free-market movement, states such as Texas, Florida and South Carolina began to enact restrictions on how state funds under their control could be handled, ensuring that the responsibility to generate maximum returns was the only thing affecting investment decisions.

The new rules helped impede the effort, for example, by environmentalists to win support for motions at big bank shareholder meetings that would block future investments and loans needed to construct new natural gas pipelines, develop deep water oil exploration sites, and build up the infrastructure of the conventional energy industry.

In response, influential free-market groups such as the Committee to Unleash Prosperity, the Competitive Enterprise Institute and the Heartland Institute began issuing reports showing that ESG investing inhibited rather than enhanced returns on investment and did not lead to economic growth.

The pushback worked. BlackRock CEO Larry Fink went on Fox Business to announce he would no longer use the term ESG “because it had been rendered toxic in too many quarters.” Later, he told the Wall Street Journal’s Gerry Baker on the “Free Expression” podcast, “Everything we do is on behalf of our clients, and everything we do is with the purpose of financial returns. There is not one thing we have ever done, whether it’s ESG or any other issue, that is not in the pursuit of financial return.”

In recent months, larger asset management firms have been less supportive of shareholder proposals on environmental and social justice issues than they had been previously. BlackRock reports that its support at annual meetings for so-called social justice resolutions has dropped from 47 percent to 22 percent to 7 percent over three years. The same is true for Vanguard, which backed only 2 percent of environmental and social resolutions compared to 12 percent in 2022.

Apart from the attention and criticism that asset managers have received, many of these proposals are now labeled superfluous. “We voted against almost all the proposals that, quote-unquote, were ‘environmental,'” Fink told Baker. “Most of it is non-economic, and we voted against it.”

Those who argue sunshine is the best disinfectant will claim that the criticism leveled at Wall Street over its ESG embrace has made a difference to small investors whose retirement security depends on the money managers to whom they entrust their life savings. Fink would likely say it’s all about making money and managing risk — and it is — meaning he and his colleagues probably took notice of the backlash as it built and responded accordingly to meet the needs of a changing market.

Ideologically aligned investments are risky. Fink and others now seem to understand that. There’s a role for ESG investing if people want it, with the risks and realities clearly explained up front.

As the conversation moves forward on rulemaking, regulation and what the law should be, the fiduciary responsibility that money managers have to their clients to produce the greatest possible return on investment must remain the paramount consideration.

Peter Roff is a former senior political writer for United Press International and U.S. News and World Report columnist.