The ESG world is turning more to private investments

It did not matter to climate change activists that Citigroup and Bank of America held their annual shareholder meetings online this year. Protesters showed up at the banks’ offices anyway to rail against fossil fuel lending. Extinction Rebellion demonstrated outside Citigroup’s headquarters in Tribeca in New York in late April. And at the same time, activists challenged the financiers walking into Bank of America’s Bryant Park offices.

Apparently, the noisiness fell on deaf ears. This year, shareholder resolutions at Citi and BofA demanding the banks stop financing new fossil fuel projects won less support than they did in 2022.

The shift echoes a broader trend in other types of climate-related votes. Across corporate America, there are signs of scepticism over so-called Say on Climate votes asking shareholders to approve climate transition strategies, says Glass Lewis, a shareholder advisory firm. It says while shareholders of US companies were among the first to propose a Say on Climate vote in 2021, none of these proposals were approved, with support ranging from 7 per cent to 39 per cent.

“That scepticism appears to have turned to indifference, as there were no shareholder proposals on this topic at US companies in 2022,” it said in a report in March. “It is likely that the momentum around this issue has essentially ceased for the time being at North American companies.”

At this point in the annual meetings season, it is too soon to know whether support for other types of climate shareholder proposals has been sapped this year. But two years after the tiny hedge fund Engine No. 1 shocked the world with a victory to elect directors to the board of ExxonMobil, the early voting results suggest climate advocacy by shareholders is not the force it was in 2021.

At the same time, investors have cooled on dedicated funds that invest with environmental, social and governance mandates. In April, Goldman Sachs was warned that one of its ESG equity funds might be delisted because it had not attracted enough investors. And more generally investors have pulled billions from sustainable funds this year.

This is partly because of performance. For a decade, US ESG large-cap equity funds were among the best performers in the stock market. But this year, ESG funds globally have underperformed the market as “ESG darlings” in clean energy have suffered amid a flight to safety, AllianceBernstein said in a May 3 report.

Apart from performance issues, some investors with ESG goals are also reaching for other asset classes. Until now, equities have been the bread-and-butter for ESG investors. Now there are more alternatives for investors seeking to make an impact.

“The most activity around sustainable investing is really happening in the private markets,” Jonathan Hirschtritt, a managing director of sustainability at GCM Grosvenor, told an ESG conference last month in New York. His Chicago-based alternatives manages about $74bn of assets.

The supply of investable projects in clean, renewable energy has expanded thanks to the climate incentives in the 2022 US Inflation Reduction Act. And not a week goes by without a private equity firm launching a new impact investing fund in an effort to take a slice of the sustainable investing market. This is despite political headwinds such as bans in states such as Oklahoma, Florida and Texas on government pension funds being invested with ESG mandates.

“Ignore what you read,” said Michael Kashani, head of ESG credit at Apollo, told the New York ESG conference. Despite negative ESG headlines in America, “the biggest increase in [ESG] questions is from the US”.

Securitisation is another growth area in ESG. A few years ago, this was a novelty. Now, sustainable securitisation is becoming mainstream, says asset manager TCW. The firm is eyeing opportunities in solar panel leases that can be securitised and sold to investors who want diversity away from corporate issuers while also prioritising a sustainable objective, says Jamie Franco, co-head of TCW’s sustainable investing. The firm is also talking to banks about asset-backed securities based on car loans dedicated to electric vehicles.

There are weaknesses for sustainable investors in asset classes beyond stocks. Investors have complained that the private funds’ impact reports remain considerably anecdotal without the metrics needed to evaluate how much good investments are doing. The threat of “impact washing” — where firms claim they are greener than they actually are — cannot be addressed without better disclosures than are being demanded in public markets.

But for the pension funds, endowments and family offices that are increasingly demanding investments that support ESG goals, there are at least more options.

patrick.templewest@ft.com