ESG: The war between the states

‘Standing in the middle of the road is very dangerous,” former UK prime minister Margaret Thatcher once said. “You get knocked down by traffic from both sides.”

Doesn’t BlackRock just know it? The private equity titan is defending its ESG policies in two directions. On one side are red state legislators and regulators in places such as Texas and Florida, who say that BlackRock, the world’s largest investor in fossil fuel companies, is too “woke” for public pension funds to invest in. On the other side are regulators in blue states such as New York, who say BlackRock is not moving fast enough, or thinking big enough, on its promises to focus on ethical, sustainable and governance investments.

It’s become a war of attrition, and BlackRock, like so many other fund advisers, finds itself collateral damage ahead of November’s mid-term elections. Combined, conservative states have promised to yank $1 billion in pension funds from BlackRock’s portfolio by year’s end.

The firm announced its earnings October 13. It did not do as poorly as most analysts had predicted, but profits still fell 16 percent. UBS downgraded BlackRock stock from “buy” to “neutral” on October 10. It must count as at least a minor irony that ESG – an investment method aimed at curbing systemic economic risks from climate change – has itself become a threat to funds’ economic sustainability.

‘One of the most critical tasks’

BlackRock is not taking all this quietly. On October 7, the firm launched its own website, promising to set “the record straight” on ESG.

“One of the most critical tasks of an asset manager is to provide clients with insights on short- and long-term trends in the global economy that can impact their portfolios,” the company says.

“In many ways, ESG is a little bit of ‘eye of the beholder’”

Gail Bernstein
Investment Adviser Association

“We do this across all sectors – from healthcare to technology to energy. Climate risk is one such trend, given its implications for the economy. We believe that companies that better manage their exposure to climate risk and capitalize on opportunities will generate better long-term financial outcomes.”

Where the firm once held itself out as a leader in sustainable investing, BlackRock’s new site downplays its role as an innovator. “Our views on climate risk are not unique,” the adviser says. “In fact, governments, public companies and investors are increasingly focused on these issues; in 2020 more than 90 percent of the S&P 500 published sustainability reports.”

‘Facilitate, don’t mandate’

Fund advisers find themselves caught in the growing battle over sustainable investing, says Gail Bernstein, general counsel at the Investment Adviser Association. People can disagree about whether and how ESG can or should matter in an investment decision. What worries her group’s members is regulators or legislators dictating what risks they should or shouldn’t factor into their risk management.

“Our overall position is, let fiduciaries be fiduciaries,” she tells affiliate title Regulatory Compliance Watch. “Facilitate, but don’t mandate.”

ESG is a broad area, Bernstein says. Meanings can shift, and sometimes conflict. It’s not always clear what falls into social, for example, or governance.

“In many ways, ESG is a little bit of ‘eye of the beholder’,” she says. “What fiduciaries need to be doing is listening to their clients. And you should be clear about your investment strategy. You should do what you say, say what you do, and you should be honest and accurate about it. But the government should not be telling people what they should care about when they choose what to invest in or how fiduciaries in their expert judgment think that different types of risks should be weighed.”

Tough argument

That’s a tough argument in today’s Washington. Those who favor ESG investing – and a robust set of laws and rules for it – say they’re responding to a crisis of civilization. Those who oppose new ESG rules say it’s a marketing gimmick designed to help investment advisers hide their high fees.

Republicans mostly oppose ESG disclosure rules. They’ve introduced legislation in this Congress that would define fiduciary duty as focusing ­solely on economic return. If they win either the House or the Senate next month, they’ll surely enact something like it.

They’ll also likely put policy riders on spending bills to keep the SEC and other regulators from enforcing any new “woke” rules. It’ll then be up to the Democrats – nominal friends of ESG rules – to decide whether they’re willing to risk a government shutdown to protect those policies.

Europe’s stance

The politics don’t stop at the water’s edge. Europe and Britain are much more aggressive about ESG requirements. On October 18, BlackRock told a British parliamentary committee it had no intention of divesting from fossil fuel investments.

“BlackRock’s role in the transition is as a fiduciary to our clients – it is not to engineer a specific decarbonization outcome in the real economy,” the firm told the House of Commons’ Environmental Audit Committee. That has been a consistent theme in the publicly traded giant’s government filings.

ESG debt KPIs and effective fundraising

The monitoring of ESG debt KPIs for ESG-linked debt facilities is more prevalent among GPs looking to raise bigger funds, according to Investec’s GP Trends report, writes Sam Birchall.

The use of ESG in debt structures has been linked to effective fundraising among private equity firms in Investec’s GP Trends 2022 report.

Findings from a poll of 150 British and mainland European GPs reveal that the monitoring of ESG debt KPIs for ESG-linked debt facilities is more prevalent among firms that expect to raise a bigger fund next time around, compared with those anticipating “flat future fundraising.”

The data tells a story of ESG moving beyond exercises in compliance “to become predictors of effective fundraising,” the report noted.