ESG developments this week
In Washington, D.C.
ESG references in federal lobbying reports on the rise
On April 29, Roll Call reported that references to ESG in federal quarterly lobbying reports have grown over the last few months—coinciding with the start of the Biden administration. According to the paper, lobbying mentions of ESG had risen slowly during the Trump presidency:
“More lobbyists reported raising environmental, social and governance issues with U.S. officials and lawmakers this year, with Democrats now controlling Washington, than ever before….
Lobbyists mentioned the acronym ESG in first-quarter 2021 lobbying reports for 37 unique clients. The reports, which were due April 20, cover activity from Jan. 1 through March 31, including the beginning of the Biden administration and Democrats’ control of both chambers of Congress.
The figure is up from 21 distinct reports that mentioned ESG for the final quarter of 2020, 24 from last year’s third quarter, 18 from the second quarter and 14 from the first quarter. The final quarter of 2019 saw 15 reports mentioning ESG, which was the first time the term appeared widely in lobbying reports. It was mentioned once before in a report from the U.S. Chamber of Commerce covering 2018’s second quarter….
Groups that disclosed such lobbying included large trade associations, asset managers, financial services firms, insurers, pension-focused groups and at least two left-leaning organizations advocating ESG disclosure rules, the United Nations-supported Principles for Responsible Investment and Public Citizen.
Among all filings mentioning ESG, about 29 percent specifically reported lobbying on the ESG Disclosure Simplification Act, a bill from Rep. Juan C. Vargas that would require public company disclosure of ESG information. The California Democrat initially proposed the measure in September 2019. More than a dozen listed a Labor Department rule related to ESG, which was finalized under the Trump administration and changed requirements for employer-sponsored retirement plans when selecting investments.
Of the 37 reports that mentioned lobbying on ESG during the first three months of 2021, most mentioned ESG issues, disclosure, investing or ratings generally. Five groups reported lobbying on Vargas’ legislation, and three on the Labor Department rule that Democrats may soon roll back. One group detailed involvement in an ESG workgroup meeting at the Securities and Exchange Commission.
The world’s largest asset management firm, BlackRock Inc., mentioned ESG specifically in a lobbying report for the first time in 2021, reporting that it addressed the “ESG Rule/DOL.” The manager of $9 trillion also disclosed lobbying on “climate risk” for the first time.”
On Wall Street and in the private sector
BlackRock signaling increased support of ESG
On April 30, The Wall Street Journal reported that BlackRock, a leader in Wall Street’s ESG and sustainability efforts, with $9 trillion in assets under management, has used the current annual meeting season to put its proverbial money where its mouth is. According to the paper, BlackRock has increased its support for shareholder proposals focusing on environmental, social, and corporate governance matters:
“BlackRock Inc. BLK -0.97% has so far increased its support for shareholder-led environmental, social and governance proposals, and published a slew of criticisms of public companies that haven’t bent to its overall requests.
The firm votes on behalf of the investors in its many funds. For the roughly 170 ESG shareholder proposals it voted on during the first half of the proxy year, BlackRock backed 91% of environmental proposals, 23% of social proposals and 26% of corporate-governance proposals.
That included voting for a proposal to make it easier for shareholders to push for changes at Tesla Inc. and another to make Spanish airport operator Aena SME SA publish carbon-emission reduction plans. Most of the votes for the proxy year come in the six months ending in June.
For the 1,000-plus proposals for the year ended in June 2020, BlackRock backed 6% of environmental proposals, 7% of social proposals and 17% of governance proposals….
The firm is one of the top three shareholders of more than 80% of the companies in the S&P 500, according to S&P Global Market Intelligence, through its many funds. The money manager casts a long shadow on shareholder meetings where it can vote on behalf of its investors on board directors, executives’ pay packages and other company matters.”
ESG assets under management approaching $2 trillion
On April 30, CNBC (citing Morningstar) reported that ESG assets under management are now nearly $2 trillion, after massive ongoing inflows throughout the 1st quarter of 2021:
“Sustainability-focused funds attracted record inflows during the first quarter, pushing global assets under management in ESG funds to nearly $2 trillion, according to a report from Morningstar released Friday.
The rise underscores the momentum behind ESG investing, or when environmental, social and governance factors are considered. Assets in these types of funds first topped $1 trillion in the second quarter of 2020.
Global sustainable funds attracted a record $185.3 billion during the first quarter of 2021, up 17% quarter over quarter. Overall, assets in ESG funds jumped 17.8% compared to the fourth quarter of 2020.
“2021 began where 2020 left off with record demand for sustainable investment options across the globe,” noted Hortense Bioy, global director of sustainability research at Morningstar.”
Meanwhile, on April 29, ETFStream.com, citing data from Ultumus, reported that more than half of all inflows into European investment markets in the 1st quarter went to ESG-aligned funds.”
In the spotlight
Are ESG returns a mirage?
On April 26, Institutional Investor magazine reported on the results of a new but yet unpublished study on the returns generated by ESG investments. The results of the study suggested that ESG fund outperformance that supporters claim is generated by ESG factors is, in fact, generated by other, more generic factors:
“Scientific Beta, set up by EDHEC-Risk Institute in 2012 and now majority-owned by Singapore Exchange, has found that 75 percent of the outperformance of ESG strategies cited in popular academic studies on the subject was due to their exposure to the quality factor, which can be cheaply accessed through systematic funds. Quality is a well-known premium, or source of return, that academic research has shown outperforms the market over long-term economic cycles.
In a report not yet published but seen by Institutional Investor, Scientific Beta deconstructed the reported ESG performance gains to account for the potential contribution of sector tilts, factor exposures, and attention shifts, meaning the steadily growing popularity of strategies over the time period that was studied. The research group also evaluated whether incorporating ESG factors protected investors from losses, another popular claim of ESG asset managers.
“We find that over the past decade these strategies did deliver positive returns,” Felix Goltz, Scientific Beta’s research director and one of the authors of the study, said in an interview. “One example is the outperformance of a fund that holds long positions in ESG leaders and short positions in ESG laggards.”
Goltz said he wanted to quantify the specific performance that could be attributed to ESG, once everything was adjusted for generic factors, such as equity styles and industry sectors, a common practice in attribution analysis. “Well, it disappears,” he said….
“We conclude that claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed,” the authors wrote. “Omitting necessary risk adjustments and selecting a recent period with upward attention shifts enables the documenting of outperformance where in reality there is none.”…
Goltz said he thinks sustainable funds have plenty of value in terms of their potential impact on society, but outperformance isn’t one of them.”
“Peter McKillop, founder, Climate and Capital Media: When did you first become skeptical about BlackRock’s ESG push?
Tariq Fancy, former chief investment officer for sustainable investing, BlackRock: I had to figure out an investment mechanism for how to create social change because Larry was writing that in letters and I kept getting asked by clients, “How does this actually lower emissions?” So I started writing a long paper to explain how ESG and sustainable investing will, over the long term, actually start to transform capitalism into better outcomes. By the time I had finished, I realized I had just written a somewhat tortured argument that the free market will slowly correct itself. And I said, “Oh my God, we’ve known for decades that climate change is the greatest market failure in history.”
I could clearly see that the markets would not “correct” themselves without government action. At some point we have to accept that burning fossil fuels is dangerous to us unless we do something.”Peter McKillop, “BlackRock’s former head of sustainable investing says ESG and sustainability investing are distractions,” Greenbiz.com, April 28, 2021.