World’s largest money managers need a better ESG script

The setting — Marshall, Texas, population 23,000 — was unremarkable. But as a piece of political theatre, this month’s seven-hour hearing over the supposed heresies espoused by ESG’s corporate cheerleaders would have made the ringleaders of the Salem witch trials proud.

Lone Star state senators, one of whom previously asserted that the “primary driver for global warming is the sun”, lined up to excoriate the world’s largest asset managers for neglecting their fiduciary duties with “woke” investment decisions, and for using their votes at shareholder meetings to push their purported ecological and social agendas.

These practices represented no less than “existential threats to our economy here in Texas and to the US”, said Bob Hall, a Republican lawmaker who has dedicated time to warning about the threat of “electromagnetic pulse weapons”. His ESG sentiments are echoed by GOP counterparts in Washington, who have vowed to use their new powers in Congress to hold similar inquests over the coming months.

Such melodrama may be easy to mock. With ESG being so broadly defined as to be rendered almost meaningless, there is scant evidence to suggest that the trillions of dollars worth of investments under its umbrella have underperformed more traditional assets.

Red herrings abound, including FTX’s award of a higher corporate governance score than ExxonMobil by one of hundreds of ESG rating bodies, or Elon Musk’s complaint that his electric car company Tesla, downrated largely because of its controversial labour practices, ranks lower than the oil and gas major.

Yet, the tactics and motives of Texas’s interrogators notwithstanding, the state’s criticism of ESG provided valuable insight.

Beyond the pleasing spectacle of shibboleths being politely challenged — a refusal to call “engagement” anything other than “voting” — witnesses struggled to reconcile their companies’ Davos-pleasing statements with their core missions as money managers.

After affirming that BlackRock does “not make any commitments or pledges with our clients’ money”, head of external affairs Dalia Blass did not fully defend a line on the company’s website that states its aim in joining an environmental initiative was “to help ensure the world’s largest greenhouse gas emitters take necessary action on climate change”. 

Lori Heinel, global chief investment officer for State Street, testified that her company, which offers passive funds, has “a fiduciary duty to encourage portfolio companies to consider long term risks”.

She went on to say that although companies attuned to ESG concerns “will be best in class”, she did not “believe that ESG factors per se drive long- term returns” and conceded there was not a “formal financial analysis” behind State Street’s vote for a racial equity audit at Chevron.

Questioning of a representative for proxy adviser ISS, which expressed regret for recommending that Texas pension funds vote against energy projects, almost descended into farce as the company admitted that some of its proposals were based “on what we are hearing from the marketplace”.

Bigger stages await these companies, and plaintiffs’ law firms are gearing up for a wave of ESG-related litigation in which evidence given at hearings will surely be cited.

Rapidly retreating to an ESG strategy focused purely on what Oxford university professor Robert Eccles refers to as “managing material risk factors” — rather than loosely defined ethics — might neutralise some impending attacks even as it upsets progressives. At the very least, it would provide a better script for repeat performances on Capitol Hill.