Wall Street titans confront ESG backlash as new financial risk

Wall Street’s largest asset managers, private equity firms and brokers have warned that a backlash against sustainable investing is now a material risk, in filings that show how acrimony over ESG principles has become a perceived threat to profits.

A dozen big US financial companies including BlackRock, Blackstone, KKR and T Rowe Price added language to annual reports filed in the past month cautioning that pressures such as “divergent views” or “competing demands” on environmental, social and governance (ESG) investing could hurt financial performance.

The statements come in response to a campaign against what opponents describe as “woke capitalism” that has drawn support from such high-profile Republican politicians as US Senate minority leader Mitch McConnell and Florida governor Ron DeSantis.

Officials in Republican-led US states have launched investigations into BlackRock and State Street over their votes on shareholder proposals. State legislators are considering or have passed laws requiring government pension funds to divest from money managers who consider climate or racial equity concerns in their investing.

Blackstone, the world’s largest private equity firm, disclosed that states’ scrutiny over potential “boycotts” of the fossil fuel industry could affect fundraising and revenues, according to the 2022 annual report it filed with the US Securities and Exchange Commission last week. Divergent views on ESG increase the risk that action or inaction “will be perceived negatively by at least some stakeholders and adversely impact our reputation and business”, Blackstone said.

Anti-ESG sentiment has “gained momentum” across the US, the private equity firms Carlyle, TPG and Ares all said in annual reports as they cautioned that anti-ESG legislation could impede fundraising.

BlackRock chief executive Larry Fink has said Republican state treasurers last year pulled about $4bn from the asset manager over ESG concerns. BlackRock and its rival State Street were berated for their ESG investing policies at a Texas legislative hearing in December. In annual reports, both companies also added new language this year about risks stemming from opposition to ESG.

State Street’s filing said scrutiny of ESG practices has become political and a reputational risk, adding that it has received information requests as part of states’ investigations.

T Rowe Price and Raymond James, investment managers that have thus far escaped political criticism, also warned about “conflicting” and “divergent” opinions of ESG in their annual reports.

Risks from ESG pushback extend beyond investment managers. US Bancorp said “differing views” among its stakeholders could damage its reputation. Morningstar, a data provider that also owns an ESG ratings business, said it has had to spend money to respond to political inquiries about its ESG practices.

The disclosures follow several years after money managers began adding language to annual reports about financial risks posed by pro-ESG advocates. Most major banks and asset managers continue to warn about the prospect of failing to meet demand for ESG-friendly products, claims of “greenwashing” or allegations that they are not adequately addressing dangers of climate change.

Some anti-ESG state legislation has fizzled out this year. In the coal-rich state of Wyoming last week, lawmakers voted down two bills that would have cut ties with investment firms deemed to have avoided energy companies out of environmental concerns. State officials had warned that the broadly written legislation could cost pension funds money by unduly restricting their choices.

The fight is now moving to the federal level: Republicans in Congress are seeking to block the Biden administration from allowing retirement plans to consider ESG standards.