ESG developments this week
Economy and Society is Ballotpedia’s weekly review of ESG stories that characterize the growing intersection between business and politics.
Around the world
Law firm alleges BlackRock misled investors with environmental claims
ClientEarth—an environmental law charity based in London—has filed a complaint with French regulators claiming BlackRock (the world’s largest asset manager) uses misleading environmental claims to promote its investment funds:
ClientEarth has filed a complaint with the French financial regulator AMF against BlackRock, claiming the investor has undertaken “misleading marketing” of some of its funds. The environmental organisation said it has identified 18 actively managed retail investment funds marketed in France with “sustainable” in their names, which collectively hold more than $1 billion of fossil fuel investment, the majority of which represents fossil fuel expansion. Two of the funds flagged in ClientEarth’s complaint are classified as Article 9 under the EU’s Sustainable Finance Disclosure Regulation, and 16 are classified as Article 8. ClientEarth has made reference to alleged breaches of SFDR, the regulation’s Do No Significant Harm (DNSH) criteria, European watchdog ESMA’s naming guidelines, and the AMF’s own fund marketing rules. In addition to filing the complaint with the AMF, Client Earth said it would notify EU watchdog ESMA of the action it has taken.
A spokesperson for BlackRock said: “BlackRock’s funds are managed in accordance with their investment objectives that are clearly disclosed in each fund’s prospectus and on BlackRock’s website. BlackRock’s sustainable funds are managed in line with applicable regulations governing sustainable investing.” AMF said it does not comment on individual cases.
Investor support for ESG lags in India
Although some asset managers have reported interest in India’s ESG funds, investors have not shown significant interest in the approach. In total, ESG funds under management in India top just over $1 billion. According to Responsible Investor:
ESG has been slow to establish itself in India. Indian fund managers launched 11 ESG strategies between 2018 and 2021, according to Morningstar data. But the domestic fund market has not seen a new ESG offering since.
Interest in managing assets according to sustainability principles remain non-existent in the institutional market, says SBI Mutual Fund’s chief ESG research officer Priyanka Dhingra. SBI MF manages India’s largest ESG strategy by some distance – its ESG Exclusionary Fund makes up just under half of India’s total ESG fund assets at $568 million.
“We have not seen any ESG mandates come from either of the two largest pension funds in India, the Employees’ Provident Fund Organization and National Pension System, or any requests for sustainability disclosures or exclusions from any other institutional clients,” says Dhingra. “All of the funds operating in the Indian market are there by virtue of the proactiveness of the asset managers.”
ESG support drops in emerging markets
Investors in developing countries worldwide have also pulled money out of ESG investments overall for the third year straight. According to Bloomberg Law:
Sustainable investments in emerging markets are facing a reckoning as environmental, social and governance strategies crumble under the weight of ongoing capital outflows and the appeal of higher-yielding energy bonds.
ESG investments in developing nations have floundered over the course of the past year, with emerging markets recording a third year of consecutive outflows, largely due to tighter global monetary policies in both developed and emerging economies.
Even as interest rate cuts by the Federal Reserve promise new capital flows into developing economies, backers of sustainable debt confront a harsh truth: Spearheading this year’s returns are bonds issued by borrowers with tarnished ESG reputations, raising questions about the financial viability of sustainable investing strategies.
In the states
ESG critics testify in favor of Texas anti-ESG law
Two ESG opponents—William Hild (the executive director of Consumers’ Research) and Eric Bledsoe (a senior fellow at the Foundation for Government Accountability)—gave testimonies before the Texas Senate on Oct. 17. They argued the state’s anti-ESG laws produced positive results and said non-ESG investment funds tend to outperform investments that consider other factors:
Eric Bledsoe, a senior fellow at the Foundation for Government Accountability, and William Hild, the executive director of Consumers’ Research, shared the findings Thursday before the Committee on State Affairs. …
Bledsoe noted that investors’ fiduciary responsibility to beneficiaries often takes a back seat with ESG. He cited a 2019 study which found that out of 20,000 mutual funds representing over $8 trillion, regular funds outperformed ESG funds every time.
Bledsoe commended Attorney General Ken Paxton’s 2022 letter to BlackRock executives, who at the time helped manage Texas’ pension system, for pushing ESG policies to the detriment of fiduciary returns.
On Wall Street and in the private sector
UBS lawyers give guidance to bankers selling ESG products
Lawyers at UBS issued guidance to the firm’s bankers on avoiding accusations of misleading marketing and labeling of ESG investment products. Legal teams throughout the industry have issued similar warnings to promote compliance with international regulations:
The development affects the kind of language bankers are free to use when presenting a whole array of topics spanning net-zero goals to individual transactions for clients, the people said asking not to be identified revealing internal deliberations. Specific products such as debt-for-nature swaps are among those affected by the heightened level of legal anxiety, one of the people said. …
The decision to rein in the use of certain ESG (environmental, social, governance) product labels and claims at UBS coincides with a wider shift inside the finance industry, as regulators in Europe churn out stricter rules and the number of activist lawsuits increases. In the US, meanwhile, ESG labels risk triggering the ire of Republican lawmakers intent on banning the financial strategy outright.
The guidance at UBS is designed to ensure the bank isn’t accused of greenwashing or seen to be non-compliant with emerging regulations, one of the people familiar with the matter said.