ESG Backlash In US Finance, With More To Come In 2023

ESG, or environmental, social, and governance problems, as they are known in the sector, might reduce returns to investors, according to detractors.

Oil price increases this year boosted their argument by undermining the profitability of many ESG funds that had shifted away from energy equities, which are responsible for a substantial portion of climate-damaging carbon emissions.

Despite this, the number of financial corporations joining industry alliances aimed at assisting businesses in making the transition to a low-carbon economy grew as scientists warned that time was running out to stop global warming.

This year, activist shareholders achieved key successes at corporate annual meetings, such as a proposal for a human rights report at weapons manufacturer Sturm Ruger & Co. (RGR.N).

For most of the year, BlackRock (BLK.N), the world's largest money manager, was in the middle of the storm, with its CEO kicking off the year with a defense of ESG investing in a letter to peers.

Because of its position on climate change, BlackRock, along with JPMorgan (JPM.N), Goldman Sachs (GS.N), Morgan Stanley (MS.N), and Wells Fargo & Co (WFC.N), was subsequently forbidden from gaining state business from West Virginia.

Other states followed suit, with Texas accusing BlackRock and banks such as Bank of America (BAC.N) of 'boycotting' fossil fuel corporations as the country moves toward a greener economy. Florida said that it will withdraw $2 billion in assets from BlackRock.

In other news, Missouri has initiated an inquiry into rating firm Morningstar (MORN.O) to see if its ESG rankings breached state consumer protection laws, while Texas and others have launched a probe against S&P Global (SPGI.N).

However, left-leaning organizations such as the Sierra Club and Democratic state politicians, who combined have more money to invest, urged BlackRock and others to hold strong or be even more ambitious in their climate initiatives.

WHY DOES IT MATTER？

The criticism comes at an important juncture in global climate efforts. A key United Nations study issued earlier this year said that time was running out to limit global warming to 1.5 degrees Celsius by 2050.

The Republican legislators' pressure has already had a chilling effect, with Vanguard, the world's largest mutual fund manager, recently withdrawing from the Net Zero Asset Managers (NZAM) project, a group of investors aiming for net-zero emissions, citing a need to establish its independence.

Meanwhile, the Securities and Exchange Commission (SEC) has been under pressure to pull down proposed restrictions on climate-related financial disclosures.

Given that the United States has the world's largest economy and numerous huge multinational corporations, any fracture of the regulatory reaction from the world's leading economies might dampen their aggregate influence.

WHAT DOES THIS MEAN IN 2023？

With a number of investigations into finance-related ESG actions currently ongoing in several states, the chance of a respite in 2023 appears bleak.

Market participants will be watching how prominent investors use their voting power during the annual shareholder meeting season, while BlackRock has already said that it does not foresee much change from last year.

The conclusion of the SEC's climate disclosure standards, as well as its attempts to curb 'greenwashing,' in which companies make deceptive assertions about their environmental initiatives, will all help determine the country's future of ESG.

For others, the ESG topic is even more existential: has it grown so politicized that businesses have decided to avoid using it in marketing and corporate communications, maybe in favor of other, less loaded words？

Explore Reuters' roundup of the year's most important news items, as well as the prognosis for 2023.

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