Aiming for social responsibility has become increasingly mainstream in recent years — even in the bottom line-focused world of asset management. But, due to recent political pressure, investment losses and a backlash against so-called “green-washing,” some investment firms are rethinking their strategies.
Indeed, the common acronym ESG — Environmental, Social and Governance — is being replaced with the term “transition investing” by some companies. Both terms encompass how investment managers seek to put money into companies that are considered ethically and socially forward-thinking.
The highest-profile example: BlackRock, the world’s largest asset manager with more than $10 trillion under management has now rebranded to “transition investing.” The asset manager has been taken to task publicly, politically and financially for its historically aggressive commitment to ESG investing. The rebrand is seen to point up a growing change in asset management firms in general, eager to improve their returns as well as appeal to audiences who might see ESG investing as “too woke” for primetime.
“The meaning of ‘ESG’ has changed over time,” points out Chris Fidler, head of Global Industry Standards at the CFA Institute. In its original conception, Fidler says, ESG investing was meant to “contribute to better outcomes in terms of sustainable development.” However, as integration has become more popular, “this nuance was lost…ESG became an umbrella term for any investment approach that considered… values-based exclusions and positive impact strategies. Several years ago, some people began to equate ESG with specific political views.”
For those tracking institutional investing, this change of course may seem sudden and surprising. Up till recently, the number of portfolios with significant ESG holdings ESG-related investment has grown rapidly to more than $17.5 trillion worldwide in 2020, according to the UK’s Organisation for Economic Cooperation and Development (OECD).
Similarly, PricewaterhouseCoopers LLP found that roughly 15% of the total 127.5 trillion global assets under management (or $18.4 trillion) were in ESG funds as of 2021. At that time, PWC projected that ESG funds would make up 21.5% of all global assets under management by 2026; just three years ago, Bloomberg predicted ESG-held assets would represent more than $53 trillion by 2025, as large institutional investment firms like BlackRock seemed bullish on this well-performing, seemingly positive “sustainable” sector.
“The biggest pro of socially responsible investing is that it may help people feel better about their investments,” says Robert R. Johnson, PhD, CFA, CAIA, chairman and CEO at Economic Index Associates and a professor of finance at Creighton University. But ESG means different things to different people. As Johnson points out, “beauty often lies in the eye of the beholder. That is, some individuals consider some factors socially responsible while others don’t. For example, “Tesla is also held in many ESG funds despite its widely criticized governance structure,” he says.
Cracks were starting to show in ESG’s historically well-supported surface over the past year or so. Even Larry Fink, CEO of BlackRock, was starting to de-emphasize the importance of environmental, social and governance issues in a 2023 letter to investors. Despite BlackRock’s recent $12.5 billion purchase of Global Infrastructure Partners, a private equity firm explicitly focused on new energy and digital infrastructure, ESG critics point to a turning tide, where a more wide-ranging embrace of “transition investing” has broader appeal, less political stigma and potentially greater financial returns.
BlackRock Takes the Heat
For over two years, BlackRock has been squarely in the sights of critics who feel ESG is aimed at paying lip-service to social agendas without serving investors. As of June 2023, Fink said the term “ESG” had become too ‘politicized’ and ‘loathed.’ But, given how closely aligned BlackRock has been a proponent of ESG investing, it may be too little too late.
In March, the Texas Board of Education alone pulled out $8.5 billion in investments from BlackRock, condemning its long-held commitment to ESG as “trying to destroy the domestic oil and gas industry while managing funds that depended on royalties derived from that very same industry,” according to a X post from Will Hild, executive director of Consumers First. In December 2023, the Tennessee Attorney General filed a lawsuit against BlackRock, claiming the firm “misrepresented” the lengths to which it focused on ESG in its investment strategies and its focus on sustainability.
Also in March, Mississippi Secretary of State Michael Watson filed a cease-and-desist order against BlackRock to stop the investment giant’s alleged “fraudulent action” and impose a multimillion-dollar penalty over the company’s ESG investment policies. “Investment companies will not push their political agenda on Mississippians, especially through fraudulent and deceptive means,” Watson said in a statement.
In a response statement, BlackRock said: “Many policymakers and government officials have ideas on how we should invest our clients’ assets. We are always bound to invest consistent with our clients’ choices, their best financial interests, and applicable law. Our only agenda is maximizing risk-adjusted returns for the funds our clients choose to invest in. We operate in one of the most highly regulated industries in the country and are committed to following the law in every respect.”
According to Nick Cantrell, founder and wealth advisor at Green Future Wealth Management, BlackRock’s rebranding “clearly has at least something to do” with this political and social backlash. “That being said,” Cantrell adds, “ESG was always a poorly labelled strategy and process, and the opaque nature of ‘ESG investing’ has often meant that investors aren’t exactly sure what they are buying.”
The change from ESG to “transition investing” not only signals a broader, potentially more watered-down approach to socially responsible investments, but it’s also confusing. “Changing names midstream is annoying,” says Kylelane Purcell, owner of Till Investors, an educational resource for sustainable investors. “It’s a problem for companies that try to create and sell sustainable investing products; it’s a problem for advisors and others that try to explain how these products work. It’s especially a problem for investors trying to find the right fit.”
While blogging on the topic in 2019, Purcell says that she was already reviewing “how confusing names and unclear definitions were a roadblock for many investors. Back then, we talked about the distinctions between ‘ESG,’ ‘social responsibility,’ and a host of other terms that attempt to define the concept of investing with your values in mind. It wasn’t easy then, and it remains challenging today.”
Dig deeper about ESG policies:
- Banks Must Prepare for Climate Change, Regulators Finally Say How
- Can Banks’ Agendas on Social Issues Drive Growth?
Despite the backlash, ESG still may have lots of life and opportunities to offer. During the first three months of 2020 and the onset of the COVID-19 pandemic, more than $45 billion was directed into global ESG funds. “Some financial advisors are turning away from ESG because of political tensions … but sustainable investing isn’t politics,” Purcell maintains. “It’s smart, long-term investing with a very fine track record.”
In contrast to claims ESG investing doesn’t serve investors, Morningstar found that over the past decade, 80% of blend equity funds invested sustainably outperform traditional funds. In addition, more than three-quarters (77%) of ESG funds that existed 10 years ago have survived, compared with just 46% of traditional funds, per Morningstar.
| Year | Vanguard ESG U.S. Stock ETF (ESGV) |
|---|---|
| 2019 | 33.4% |
| 2020 | 25.7% |
| 2021 | 26.4% |
| 2022 | -24.0% |
| 2023 YTD | 24.8% |
But how will “transition investing” differ from ESG investing? ”
Transition investing must be detailed with specifics, otherwise it will meet the same end as ESG,” says Naeem Siddiqi, senior risk advisor at SAS. “Will it become a fig leaf for firms to continue, or even increase, investing in fossil fuel and other polluting entities under the guise of ‘we’re still transitioning’? Will it be enough for opponents to accept climate change and support efforts to transition to a low-carbon economy?”
In recent years, Fidler points out, many investors have taken an interest in funding projects and initiatives that will help “decarbonize the economy. This is sometimes referred to as ‘transition investing.'”
“It is wholly different from ESG integration, and it should not be viewed simply as a rebranding of ‘ESG,'” according to Fidler. “At the same time, they are not incompatible. Transition investing and ESG integration could be used together in a given investment strategy. Investor interests and investment practices are always changing. New terms will always be emerging.”
KE Hoffman has been writing about the financial industry — and fintech specifically — for more than three decades. When she’s not writing, Hoffman is content to read and hang out with her husband and her pack of very domesticated dogs.