- ESG's fiduciary standards and potential greenwashing attract critics across the political spectrum.
- Blackrock's support of ESG has made it the prime target for scrutiny.
- Despite its popularity in recent years, sustainable investing's impact remains difficult to assess.
The state of Florida said it will divest $2 billion of investments overseen by BlackRock (BLK), the world's largest asset manager, because of the firm's support for sustainable investing.
Florida is the latest state to pull assets from BlackRock, a leading proponent of environmental, social and governance (ESG) investment strategies, which focus on investment in companies that operate based on Environmental, Social and Governance concerns.
"Using our cash to fund BlackRock's social-engineering project isn't something Florida ever signed up for," Jimmy Patronis, Florida's chief financial officer, said in a released statement. "It's got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do."
Sustainable investing has gained increasing prominence in the past decade, with hundreds of investment funds established to focus on firms specifically adhering to ESG principles. But the approach has attracted increased scrutiny from institutional investors such as pension funds, who worry that ESG strategies may fail to meet fiduciary responsibilities by potentially sacrificing potential investment returns in favor ESG standards.
Conversely, ESG strategies have encountered increasing criticism for turning a blind eye to greenwashing. Many investors worry the rising focus on ESG investing either leads funds and companies to make unsubstantiated claims that overstate the positive impact of their policies or understate the impact of their environmentally or socially damaging operations or a combination of both.
In the Crosshairs
BlackRock, an early ESG investing advocate and manager of $8 trillion in global assets, has turned into the poster child for ESG critics across the ideological and political spectrum.
Some Republicans view the firm as a climate activist too focused on a battle against global warming to adequately meet what they see as its primary purpose: making money for investors.
Some Democrats, on the other hand, see BlackRock's ESG support as hypocritical because it continues investing in companies they view as anti-ESG, such as fossil fuel producers.
That has led to an amalgam of state-by-state policies toward public ESG investments, mostly depending on which party controls a given state's executive and legislative branches.
Five primarily Republican-led states have restricted the use of ESG factors in state investments. Other states, including Louisiana and Missouri, have also directly pulled money from BlackRock. Still others, including Texas, have banned state and local government entities from doing business with firms that have reduced investments in companies based on ESG factors.
Conversely, four primarily Democrat-led states have enacted policies promoting the integration of ESG investment standards, and several others have urged divestment from firms or industries viewed as anti-ESG.
Earlier this year, BlackRock CEO Larry Fink insisted the firm's approach of promoting society's broader interests ahead of profits transcends politics.
"Stakeholder capitalism is not about politics," he wrote in his annual letter to corporate leaders in January. "It is not a social or ideological agenda. It's not 'woke.'"
ESG: Financially Inconclusive
Combined, U.S. states now have pulled at least $3.3 billion from BlackRock because of its ESG support, and Florida's action seems to indicate the scrutiny may continue to grow.
Some investment analysts have expressed concerns about the potential impact of that scrutiny on BlackRock's business prospects, particularly amid the financial market challenges the company has faced this year. Shares of BlackRock fell 1.3% Friday, extending their year-to-date loss to 21%.
At the same time, questions have arisen about how well firms evaluate their ESG practices and whether ESG investments benefit or detract from investment returns.
A recent study cited by Harvard Business Review found that 70% of corporate executives lack confidence in their reporting on non-financial matters such as ESG, and researchers have found that companies in ESG investment portfolios have worse labor and environmental compliance records than those in non-ESG portfolios.
Meanwhile, whether companies and investors benefit financially from ESG approaches remains somewhat inconclusive, despite extensive research.
A research paper sponsored by the Stern School of Business at New York University found that sustainability initiatives improve corporate financial performance, and ESG helps protect investors from downside losses. But a recent Journal of Finance paper found that highly rated ESG funds have not outperformed lowly rated ESG funds in investment returns.