Backlash against ESG investing in US may be transient, but may also have lasting impact
Now more than ever, investors need to examine whether fund managers walk the talk in their sustainability claims and branding
THE backlash against ESG (environment, social and governance) in the US began long before the presidential elections in 2024. But since President Donald Trump formally took office in January, the rollback of DEI (diversity, equity and inclusion) initiatives, which fall under the “S” or social element of ESG, has gathered pace. Large companies such as Target, Meta and Amazon have scaled back their DEI programmes. DEI, associated with the “woke” culture in the US, isn’t the only thing that has incurred the ire of American conservatives.
BlackRock, the world’s largest fund manager and arguably the most prominent advocate of “purpose” in investing, perhaps exemplifies the tightrope US-based managers are currently navigating. Larry Fink, BlackRock chief executive, has stopped using the term ESG because “it has been entirely weaponised”, he has said. He now favours “transition investing” instead.
Along with other managers, BlackRock has dropped out of climate groups such as the Climate Action 100+ and the Net Zero Asset Managers initiatives. Vanguard and BlackRock have also toned down their diversity guidance for companies’ boards, taking a less prescriptive approach. BlackRock, for instance, has removed a 30 per cent diversity target for S&P 500 companies that it previously had.
But the most recent challenge was posed by the US Securities and Exchange Commission (SEC), which has issued more onerous guidance in terms of disclosure and other requirements for fund managers that are seen to influence corporate behaviour. The SEC action is widely expected to dampen managers’ engagement with companies – until now a key approach to get companies to take action on climate and social issues. According to the Financial Times, BlackRock has shelved meetings with companies where activism issues and proxy ballot voting are typically discussed.
The developments raise some discomfiting questions: How committed were US corporates and asset managers to ESG and DEI in the first place? Was the flurry of activity in the past few years simply an exercise to get sustainability ratings up, and burnish ESG credentials for investors and funds? What happens when Trump’s term ends? Where do all these developments leave investors who wish their funds to be sustainably invested? This last question applies particularly to assets invested in passive indexed funds, where investors generally rely on big managers to cast proxy votes in favour of environmental and social (E&S) resolutions.
The chill cast among large US managers is evident. A study by Sustainalytics on proxy voting by US managers in 2024 found that the gap between US and European managers in their support for ESG issues has widened into a “chasm”.
It found that the average support for E&S proposals in the 2024 proxy year by 20 large US firms fell to 31 per cent, from a peak of 54 per cent in 2021. It also found that, for the first time in the last five proxy years, US firms’ support for environmental resolutions fell below social resolutions. In contrast to large US managers’ declining support, support among large European managers has remained steady and consistently higher than US managers by around 20 to 25 percentage points.
For investors for whom sustainability is a key criteria, the current anti-ESG wave among US managers could be transient. But it may leave a lasting impact – not for the better. Now more than ever, they will need to examine whether managers walk the talk in their sustainability claims and branding. Or cast their net wider among European managers.
