ESG is facing a decline, evident from the actions of BlackRock, a prominent financial manager and strong advocate of Environmental, Social, and Governance investing. In a bold move, BlackRock acknowledged that the ESG movement has gone too far and vowed to be part of the solution to prevent its excessive influence from damaging the US economy. The company announced a scaling back of its support for environmental and social shareholder demands in the “proxy” process, approving only 7% of these proposals in the 2023 fiscal year, compared to 22% in 2022 and 47% in 2021. BlackRock cited the overreach, lack of economic merit, and redundancy of many shareholder proposals. This common-sense approach deserves applause.
Shareholder proposals, voted on during annual meetings of public companies, began to incorporate ESG principles into corporate America over the past decade. With support from major shareholders like BlackRock, Vanguard, and Fidelity, as well as shareholder advisory firms such as ISS and Glass Lewis, these mandates aimed to reduce carbon footprints and promote diversity on corporate boards. However, ESG quickly turned into a tool for activist groups with their own political agendas, disguised as committed long-term shareholders. The term “diversity” became synonymous with rigid quotas, and environmental concerns restricted oil drilling even when supply shortages occurred due to geopolitical events. ESG also pressured corporations to adopt radical visions of America.
The backlash against ESG was fuelled by red state officials canceling contracts with money managers promoting ESG, as well as rising inflation and gas prices. Consumers distanced themselves from Disney due to its injection of leftism and gender politics into programming aimed at children. Bud Light sales plummeted after a disastrous advertising campaign featuring a transgender influencer. Retailer Target faced boycotts and had to alter its course due to controversial swimwear displays. Larry Fink, the founder and CEO of BlackRock, even renounced the term “ESG” due to its political baggage.
Losing BlackRock’s support is significant for the $30 trillion-plus ESG ecosystem, given its status as the largest money manager globally, with $9 trillion in assets under management. Fink, who initially championed ESG, came to realize its downsides and began pushing back against its excesses several years ago. He warned against strategies that solely focused on limiting supply without addressing demand for hydrocarbons, as it would lead to higher energy prices and worsen polarization around climate change. Notably, Fink stood up to New York City’s Comptroller Brad Lander, who attempted to pressure BlackRock into divesting from oil companies. Fink understood the negative consequences of such divestment, both for the stock market and pension returns.
BlackRock has recently adopted a more selective approach to ESG screens in its actively managed stock funds. ESG considerations are only used informatively and do not play a decisive role in stock selection for its $4.5 trillion equity portfolio. To provide perspective, BlackRock manages another $4.1 trillion in passive funds that do not incorporate ESG components. Only approximately $600 billion of their assets are heavily influenced by ESG methodology, as these funds invest in renewable energy and ESG-compliant companies. This approach aligns with BlackRock’s long-standing practice of managing money based on clients’ needs and desires.
While ESG remains popular in Europe, for US investors, it appears to be more of a superficial aspect at BlackRock rather than a crucial factor in decision-making. This shift is a positive development that acknowledges the limitations and risks associated with excessive reliance on ESG.
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