Economy and Society, November 15, 2022: Former BlackRock senior adviser expresses concerns with ESG

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In the States

State Financial Officers Foundation holds a conference and makes an announcement

This week, the State Financial Officers Foundation—a nonprofit organization aimed at encouraging fiscal responsibility among state treasurers and auditorsheld its semi-annual meeting in Washington, DC. The event—attended by more than two-dozen state officials—focused on election results, and included one stand-alone speech and three expert-panel discussions dedicated to ESG and the various impacts that it may have on states.

Additionally, SFOF and its state financial official members held a press conference to announce the launch of its new retail-oriented, constituent-targeted ESG campaign and website called “Our Money, Our Values”. The SFOF press release on its new campaign read as follows:

Today, the State Financial Officers Foundation (SFOF) announced a new campaign titled “Our Money, Our Values” that will educate American public on the dangers of Environmental, Social, and Governance (ESG).

The “Our Money, Our Values” campaign, which officially launched during the SFOF National Meeting in Washington, D.C., builds on the work of state financial officers from across the nation who have taken significant actions to prevent ESG from harming the citizens of their respective states.

“As SFOF members continue to fight for their constituents, it’s important the American people have an honest understanding of what ESG really is,” said SFOF CEO Derek Kreifels. “Our money should not be used to push policies that don’t align with our values and have nothing to do with maximizing the value of our retirements and pensions. We are launching ‘Our Money Our Values’ to help educate Americans everywhere who are being used by massive corporations like BlackRock, Vanguard, and StateStreet.”

As part of the campaign, SFOF debuted a new website that provides resources to everyday Americans so they can learn the truth about ESG and how it impacts their pocketbooks, livelihoods, and how it pushes a progressive agenda that often runs counter to American values….

To ensure the website is seen by as many Americans as possible, SFOF will begin a six-figure digital marketing effort.

On Wall Street and in the private sector 

Investors withdraw from ESG funds

Reuters reported on November 11 that ESG investment funds have seen an uptick in fund withdrawals over the last several months. In a piece titled “Money before climate; market downturn spurs ESG fund exodus,” the newswire said the following:

Funds adhering to environmental, social, and corporate governance (ESG) principles have been hit by unprecedented outflows in the market downturn, as investors prioritize capital preservation over goals such as tackling climate change.

ESG, a classification applied to fund assets currently worth an estimated $6.5 trillion, is being tested by a drop in market values fuelled by concerns that central banks hiking interest rates to fight rampant inflation will trigger an economic recession.

Investors souring on ESG funds could pose a challenge to governments seeking to enlist them in the fight against climate change. Policymakers at the COP27 climate talks in Egypt are trying this week to secure more financing from the private sector to help lower carbon emissions.

Data from research service Refinitiv Lipper shows that funds of equities, debt and other asset types dedicated to responsible investing posted net outflows globally of $108 billion this year to the end of September, the first time investors withdrew money from them over such a long period since Refinitiv started tracking them in late 2017.

Moreover, investors pulled money out of responsible investment funds – defined as such because they use criteria like ESG or religious values in their investment decisions – faster, relative to their size, than broader market funds for all but two months of 2022 through September, the data shows….

Only 31% of actively managed ESG equity funds beat their benchmarks in the first half of 2022, compared to 41% of conventional funds, according to Refinitiv Lipper.

This represents a reversal of fortunes compared to the previous years.

Former Vice President Al Gore argues ESG investing is consistent with fiduciary duties of money managers

Former Vice President of the United States Al Gore (D) has previously defended ESG investing, and he re-emerged November 8 with an op-ed in The Wall Street Journal arguing that ESG investing is consistent with investment managers’ fiduciary duties. Gore, along with his Generation Investment Management partner David Blood, wrote:

We co-founded Generation Investment Management with five other partners nearly 19 years ago as a pure-play sustainable-investment manager. We agree with much of the recent criticism of the way some investors have claimed to use environmental, social and governance factors. We are unsurprised by the recent backlash against the multiple definitions and confusing terminology, the overreliance on checklists, the potentially misleading marketing campaigns, and the frequent lack of rigor and accountability. But these criticisms are by no means evidence that sustainable investing and ESG are failed concepts. Instead, they are welcome challenges to ensure that sustainable investing and the incorporation of ESG factors are carefully defined, clearly understood and effectively practiced.

Sustainable investing is about investing in businesses that are driving toward a world with low greenhouse-gas emissions that is also prosperous, equitable, healthy and safe. It is consistent with the fiduciary duty that investment professionals owe their clients. Those who don’t take sustainability factors into account aren’t fulfilling that duty.

Widespread marketing and greenwashing campaigns have contributed to confusion in the financial marketplace about what ESG is and what it is not. Put simply, ESG analysis is a tool to advance sustainable investing; it isn’t an outcome in itself. We see environmental, social and governance factors as critical inputs into decisions about where to invest money. Investors should take ESG factors into account alongside more-traditional measures such as expected cash flow….

Since all businesses affect social and environmental issues, for good or ill, all investment must consider risk, return and impact as part of fiduciary duty. Negative environmental and social effects are headwinds on future business success; positive effects are tailwinds. Developing comparable data sets on impact, robust standards, and measurement and reporting norms should be the highest priority for sustainable investors. Accountability is essential.

We acknowledge that sustainable investing is hard. Not everything is a win-win. And not all businesses that are sustainable are good investments, because the fundamentals of finance still apply. Yet we believe sustainable investing is the best investment approach and will increasingly be recognized as such. Banning consideration of ESG factors would not only lead to poor investment outcomes; it would constitute a clear dereliction of fiduciary duty.

Former BlackRock senior adviser expresses concerns with ESG

Over the weekend, The Wall Street Journal published Angel Au-Yeung’s review of the new book “Sustainable: Moving Beyond ESG to Impact Investingby Terrence Keeley. A former BlackRock senior adviser, Keely wrote the book to express his concerns with the ESG investing model. Last year, Tariq Fancy, the former director of sustainable investing for BlackRock made headlines when he argued that ESG was a marketing tactic that had little or no impact on corporate sustainability or the environment. From the review:

Terrence Keeley had been at BlackRock Inc. for about a decade when he reached a contrarian conclusion: ESG doesn’t work. 

Mr. Keeley spent much of his time at the asset manager overseeing a group that nurtured relationships with central banks, finance ministries, family offices and sovereign-wealth funds. Under pressure from politicians and activists, some of these investors were looking to distance themselves from companies that fall short on environmental, social and governance factors. BlackRock obliged, helping clients funnel money toward companies whose values they share.

Mr. Keeley said the strategy has proved to be neither a reliable generator of returns nor a real catalyst for change. In his new book, “Sustainable: Moving Beyond ESG to Impact Investing,” he argues that investors should shift money away from ESG indexes toward “companies with persistent environmental and social problems and engaging them to change.”…

Mr. Keeley retired from BlackRock in July, and the asset manager isn’t likely to abandon the ESG model soon. Still, the book hints at a quiet debate within a firm that has embraced the sustainable-investing movement. And it comes as the world’s largest investor is taking heat from government officials on both sides of the climate debate—for doing too much to discourage investment in fossil-fuel companies and for not doing enough….

Mr. Keeley isn’t the first former BlackRock executive to break with the company on the merits of ESG investing.

The promise of ESG “lured me to join BlackRock to begin with,” Tariq Fancy, the firm’s former chief investment officer for sustainable investing, wrote in an August 2021 post on Medium. Mr. Fancy left BlackRock in 2019 convinced that the asset-management industry’s ESG push was “leading the world into a dangerous mirage, an oasis in the middle of the desert that is burning valuable time.” 

Mr. Fancy has said governments, not investors, must take the lead on climate change. Mr. Keeley believes the markets will play a major role—just not the way they are now.