J.P. Morgan, State Street withdraw from Climate Action 100+

ESG developments this week

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.

On Wall Street and in the private sector

J.P. Morgan, State Street withdraw from Climate Action 100+

J.P. Morgan Chase and State Street—two of the largest asset managers in the world—withdrew on February 15 from Climate Action 100+, an asset manager initiative aimed at making companies reduce their carbon emissions. BlackRock, the largest asset manager in the world, announced it would reduce its involvement in the initiative:

Climate hawks have long questioned the financial industry’s commitment to sustainable investing. But few foresaw JPMorgan Chase and State Street quitting Climate Action 100+, a global investment coalition that has been pushing companies to decarbonize. Meanwhile, BlackRock, the world’s biggest asset manager, scaled back its ties to the group.

All told, the moves amount to a nearly $14 trillion exit from an organization meant to marshal Wall Street’s clout to expand the climate agenda. …

Last summer, the group shifted its focus from pressuring companies to disclose their net-zero progress to getting them to reduce emissions. State Street said the new priorities compromised its “independent approach to proxy voting and portfolio company management.” And BlackRock, which has become a political lightning rod over its embrace of climate considerations in investing, said those tactics “would raise legal considerations, particularly in the U.S.” (Hence the transfer to an overseas division.)

California retirement system CIO argues against divesting from fossil fuel companies

Christopher Ailman, the CIO of the California State Teachers Retirement System (CalSTRS)—the second-largest public pension system in the country—argued last week against ESG strategies that involve divesting from fossil fuel companies. Ailman argued divestment allows energy companies to continue polluting without interference and that a better strategy is to hold energy stocks to engage with company leadership:

The investment chief of Calstrs, one of the world’s largest pension funds, has said the tactic of dumping companies not acting on climate change is a “failure” and does not alter corporate behaviour.

Christopher Ailman, CIO of the $327bn Calstrs retirement fund, the second-largest public pension plan in the US, insists that engagement — or trying to influence companies to change their practices by remaining invested — is a better way to achieve outcomes for the environment. …

“I feel very strongly about this issue,” Ailman told me in an interview. “Divestment is an investment decision. As a solution to a social problem it is an absolute 100 per cent failure.”

Retrospective 2023 ESG data shows less demand for ESG investment products

We previously reported on January 30 that 2023 was a bad year for ESG investment funds, which experienced the first net global outflow in the history of the sector. Observers have since compiled more end-of-year data, showing fewer ESG exchange-traded funds (ETFs) were created and more funds were closed in 2023 than in the years prior:

The dwindling demand [for ESG] is evident in the Americas from the slowdown in sales of new exchange-traded funds and the pickup in fund closures and outflows, according to Shaheen Contractor, senior ESG strategist at Bloomberg Intelligence. In 2023, the region saw just 48 new ETFs introduced, down from 104 in 2022 and 125 in 2021, data compiled by Bloomberg Intelligence show.

A net $4.3 billion was pulled last year from ESG-focused ETFs in the US, marking the first-ever annual outflows. The $13 billion iShares ESG Aware MSCI USA ETF (ticker ESGU), the largest ESG-focused ETF, is seeing continued outflows this year, with $809 million yanked from the fund after a $9 billion exodus last year.

Meanwhile, 36 ESG-labeled ETFs were liquidated in the Americas during 2023, more than double the prior year, data from Bloomberg Intelligence show. Almost 60% of the funds that were closed were actively managed.

BlackRock reports growing ESG assets under management   

Opponents of ESG have pushed back against BlackRock in recent years in response to the company’s support for the investing practice. But although ESG investments struggled in 2023, BlackRock has reported continuing net inflows into its ESG funds:

The world’s largest asset manager has posted net ESG inflows every quarter for the past two years, a period that marks one of the toughest ever in the two-decade history of environmental, social and governance investing.

In all, BlackRock’s ESG-related assets under management swelled 53% from the beginning of 2022 through the end of last year, according to data provided by Morningstar Direct. Over the same period, the wider ESG fund market grew only about 8%. The money manager now oversees roughly $320 billion of ESG funds, more than any other investment firm in Europe, the US or globally. …

“BlackRock has been the biggest contributor of inflows into ESG funds over the past five years, including the past couple of years,” said Hortense Bioy, Morningstar’s global director of sustainability research. And that’s “despite the ESG backlash in the US.”

In the spotlight

ESG investing approaches adjust to war in Gaza

Russia’s invasion of Ukraine raised questions for the ESG investment industry related to what stocks ESG funds should own. ESG supporters arrived at a general agreement that funds should divest from Russian companies and allow investments in some munitions and weapons manufacturers.

Now, some ESG supporters are questioning the appropriateness of weapons investments in light of the war in Gaza:

War is always profitable for companies that make weapons and weapons systems. When Russia invaded Ukraine and the United States sent billions of dollars’ worth of weapons to Kyiv, the American arms industry raked in profits. After the October 7 attack by Hamas on Israel, which killed over 1,100 people, the market value of the biggest US-based arms companies—Lockheed Martin, Raytheon, Boeing, Northrop Grumman, and General Dynamics—increased almost immediately by around $23 billion, and some individual stocks have risen since by as much as 27 percent. (Israel’s subsequent bombing of Gaza has killed over 28,000 people, including more than 12,000 children.) But it isn’t just your usual suspects that are profiting.

A surprising number of climate- and sustainability-related exchange-traded funds (ETFs) and mutual funds have collectively invested billions in defense and weapons manufacturing companies, including the ones helping to fuel Israel’s war in Gaza. …

[S]everal climate and ESG funds appear to think that weapons manufacturing doesn’t conflict with [their] values. For example, American Century Sustainable Equity Fund has over $20 million invested in Lockheed Martin. Lockheed, the world’s largest military contractor, provides the Israeli Air Force with F-16 and F-35 warplanes, an essential component of Israel’s ongoing bombardment of Gaza. (This week, a court in the Netherlands ordered the Dutch government to stop exporting parts for F-35 fighter jets to Israel, citing the risk of their being used in serious violations of international humanitarian law.)