Any competent ESG manager will tell you their engagement policies are meaningless without the credible threat of divestment. But as investors eye the finishing line on another dramatic, chaotic and surprise-ridden year, it is apparent ESG’s most powerful weapon is being used against it.
It turns out divestment works both ways, and a look at any US newspaper confirms it. Several US states are now in a divestment battle with fund goliath BlackRock. The state treasurer of South Carolina, Curtis Loftis this month informed the Washington Examiner of his intention to divest the final $200 million of its BlackRock holdings by the end of the year, citing the US company’s “leftist worldview”.
In a letter to BlackRock CEO Larry Fink, Louisiana state treasurer John Schroeder likewise said BlackRock’s fossil fuels policies were “inconsistent” with the state’s economic interests and values.
“Your blatantly anti-fossil fuel policies would destroy Louisiana’s economy,” he said.
“This divestment is necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector. In my opinion, your support of ESG investing is inconsistent with the best economic interests and values of Louisiana.”
Utah and Arkansas are also both divested from BlackRock, albeit partially. Nobody expects a U-turn.
It may raise eyebrows to compare the American Civil War of 1861 to 1865 to what is still thankfully a war of words, but there is more than an echo of the past here.
If someone wrote a speech about southern states desperate to cling on to an old-fashioned, exploitative, but extremely lucrative economic model, it might be difficult to discern which of the two was up for discussion: slavery or ESG. I thought twice before writing that, but I’ve committed, albeit apologetically to my US colleagues.
In short: it’s fittingly ironic that the state that hosted the opening shots of the Civil War should now be at the centre of what is becoming an increasingly loud cold war over how hot the planet is getting. South Carolina is at the epicentre of anti-ESG, and it’s dragging other states into the culture war quagmire.
A Convenient Segue
Forget greenwashing and the ongoing debate how to structure, categorise and distribute ESG products. At a macropolitical level, anti-ESG is the movement’s biggest existential threat. Trump supporters clearly love it, for one.
More broadly, the US Right has leapt upon it as yet another example of woke liberal meddling in the US economy, forgetting in the process that there is a logical incompatibility between our inadequate efforts to combat man-made climate change and the apparent fatal damage supposedly already done to fossil fuel industries by ESG alone. One side must be winning and it probably isn’t ESG. For that you have powerful Southern State treasury secretaries to thank, along with lying oil companies, pernicious lobbying in the Middle East, incredulous and incompetent politicians, and financially vulnerable voters who still have no other choice but to buy plastic and petrol at the till.
Who is coming to the rescue? More time and effort is being devoted to the ESG debate than ever, and more money is being poured into research, analysis and events than even three years ago. But there is a tension between the slow-and-steady progress demanded by (on paper) very sensible initiatives aimed at categorising ESG activity and measuring results, and dramatic developments in the global economy and communities across the world.
To see this, go to Pakistan, where floods kill children who haven’t yet learned to swim, let alone read. Go to Ozoud’s waterfalls in Morocco, where a lack of rainfall has nearly ruiined the local tourist industry’s “big sell” to westerners. Or just look at how vulnerable the city of Amsterdam is to tidal crisis. Are ESG funds really solving those problems? Not in my view.
And that’s a convenient segue to one final point.
Rebuilding The Dam
One example of more time, money, and energy than ever being spent on ESG took place in Amsterdam just three weeks ago. Morningstar’s flagship conference for European institutional investors and asset owners has long taken place in the Netherlands’ most vibrant city, and this year the amount of content on sustainable investing showed the sea change in what publishers are delivering to their audiences at in-person events.
But one thing was striking. On both days, there was palpable unease at the prospect of financial services firms being left in the role of moral arbiters of human behaviour – in the absence of appropriate government intervention.
Finance rarely asks for government action, but at the very best it seemed a cry for backup from policy makers, and, at worst, a palming off of the real moral imperative ESG: that we are all going to have to make big changes to our behaviour in order to save the planet and prevent terrible human and animal suffering.
Asset managers and ESG analysts are happy selling wares they believe will contribute to that end, but they’re not that comfortable telling people they have to buy them. Nobody is saying that should be how it works, but their efforts are hardly spurring prolonged behavioural change. Worse still, entrenched (and uneducated) arguments about the role of the state are as ubiquitous within finance as they are without.
But there are still an uncomfortable truths for asset management CEOs. Their companies are now involved. Like it or not, big finance has now got a lot of skin in the game, and it can’t back out. Marketing teams’ gushing sentiments about building the future have made that an impossibility, lest their bosses be accused of hypocrisy of the highest order. To be sure, the answers are few and far between.
Follow Morningstar.co.uk for a special week of ESG content commissioned, curated, and written by Ollie Smith, James Gard, and Sunniva Kolostyak
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