An ‘R.I.P.’ FOR ESG is near

ESG is on its last legs.

How do I know this? Consider the actions of BlackRock, the big money manager and one of the initial and fiercest advocates of the Environmental, Social, and Governance investing technique. Last week, the firm, its founder and CEO Larry Fink announced something courageous in my view: The company stated emphatically that the ESG movement has gone too far, and BlackRock will be part of the solution to prevent its excesses from destroying the US economy.

As I first reported, BlackRock’s missive against ESG came via an announcement that it has scaled back on its support of environmental and social shareholder demands in the “proxy” process. It voted to approve just 7% of these proposals in the 2023 fiscal year, down from 22% in 2022 and 47% in 2021.

The reason: “So many shareholder proposals were overreaching, lacking economic merit, or simply redundant,” the firm said.

Bravo to common sense.

Proxy or shareholder proposals are voted on during public companies’ annual meetings. Over the past decade or so, ESG edicts became embedded into corporate America’s ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon footprint or mandate more diversity on corporate boards.

Yes, initially the intentions were good, until ESG turned into a leftist leviathan. Used by activist groups disguised as committed long-term shareholders, ESG became the mechanism in which the left hammered corporate America into advancing its warped political agenda. 

Diversity became a euphemism for dogmatic quotas. Looking to clean up the environment meant oil companies couldn’t drill even when supply dried up like what happened after Russia’s invasion of Ukraine, and inflation raged.

ESG also meant corporations had to adopt the most radical visions of America. I’m told that to meet ESG mandates, Budweiser disastrously hired trans woman and activist influencer Dylan Mulvaney to push Bud Light in those now-infamous social media ads. Disney infused leftism and gender politics into its programming targeting children. In store displays, retailer Target devised and displayed “tuck friendly” swimwear for trans women who hadn’t done the surgery yet.

Red state rebellion

Then red state officials rebelled, canceling contracts with money managers who pushed ESG. Inflation soared and ESG didn’t help with spiraling gas prices. People stopped watching Disney movies; sales of Bud Light continue to crater. Target was boycotted and forced to change course along with Bud.

Fink himself recently said he would no longer use the term “ESG” because it carried too much political baggage.

Losing BlackRock is a particularly big deal in the $30 trillion-plus ESG ecosystem because of the company’s size — $9 trillion in assets under management, the largest money manager in the world. Fink once seemed hooked on ESG because he really does believe corporations can enact positive change in society. It also brought in lots of business to BlackRock, and ESG funds carry higher fees.

He’s now seen ESG’s downside and he is saying enough!

To his credit, Fink for at least the past three years has pushed back against the excesses of ESG.

In January 2022, he wrote in his annual letter to investors: “Any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it, resulting in greater polarization around climate change and eroding progress.”

His sparring with NYC’s loopy leftist Comptroller Brad Lander is worth noting. Lander is supposed to be overseeing the pension investments for retired city cops, firefighters and teachers. Last year, he began pushing Fink to begin divesting all BlackRock’s oil company shares. 

BlackRock manages money for the fund, so Lander’s threats carried some weight. But Fink told him to pound sand (in the nicest possible way), my sources there tell me. BlackRock, for all its ESG talk, is the largest global investor in fossil fuels. Not only would divestment destroy the stocks of these companies, and the pension returns Lander is supposed to be protecting, but it would take inflation to dangerous new levels.

More recently, BlackRock has begun to use ESG screens more selectively in its actively managed stock funds, and then only “informatively,” people there tell me. It’s not a determinative factor in buying a stock for its $4.5 trillion equity portfolio, the people say.

For perspective, BlackRock manages another $4.1 trillion in so-called passive funds that mimic various indexes and have zero ESG components.

The remainder — only around $600 billion — is heavily influenced by ESG methodology because these funds invest in renewables and other ESG-compliant companies.

Is this something new? Senior executives there say it’s not; BlackRock has always managed money based on clients’ needs and desires.

OK, but a financial adviser with close ties to the firm says those ESG screens are used less and less for stock picking outside ESG-specific funds.

“ESG is still popular in Europe,” the adviser tells me. “For US investors these days it’s mostly window dressing at BlackRock. It’s not really used in decision making any more.”

Amen to that.