The decisions last week by JPMorgan Chase, State Street, and BlackRock to withdraw from or sharply limit their participation in the United Nations Climate Action 100+ coalition signal a broad shift in the asset management space against strict adherence to the environmental, social, and governance (ESG) doctrine that has helped set policy for years, business experts have told The Epoch Times.
JPMorgan and State Street will no longer support the coalition at all, while BlackRock will pare down its involvement significantly by making participation a prerogative of its foreign-based investment management division.
These developments are surprising only to those who fail to appreciate how much pressure asset managers are under to perform well and satisfy shareholders, and how arbitrary and nettlesome ESG requirements are, observers say.
“Investment decisions made on the basis of climate policy are usually less profitable. If that weren’t so, there would be no need for special inducements; firms would make those investments regardless. In short, participating in Climate Action 100+ is both legally risky and costly,” Charles Steele, chair of the Economics, Business, and Accounting Department at Hillsdale College in Michigan, told The Epoch Times.
An About-Face
Though BlackRock may still have limited involvement in the activities of the coalition, which uses the financial clout of participants to compel companies to adopt ESG policies and curb carbon emissions, its about-face strikes many as a radical shift given CEO Larry Fink’s high public profile as an ESG crusader.In January 2020, for example, Mr. Fink described the climate crisis as one of the most important issues driving financial sector firms, noting in an annual letter to shareholders that what he called “a tectonic shift in capital” was underway globally and that sustainable investments around the world had reached $4 trillion.
In that letter, Mr. Fink urged managers to issue reports in compliance with the Task Force on Climate-related Financial Disclosures (TCFD) and went so far as to suggest that companies that failed to toe the line on ESG investing were bound to fail.
“The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators—startups that help the world decarbonize and make the energy transition affordable for all consumers,” Mr. Fink wrote.
He then asked point blank of companies operating in the midst of the global push toward ESG: “Will you go the way of the dodo, or will you be a phoenix?”
Four years after that letter, developments suggest that Mr. Fink and other CEOs in the asset management space now view blind adherence to ESG as the way of the dodo.
“The larger financial institutions seem to have been looking at their investment products and questioning the value of ESG on a number of fronts,” Claire Cummings, a managing partner of the London-based law firm Cummings Pepperdine, told The Epoch Times.
A Global Trend
Ms. Cummings sees this phenomenon playing out in the European Union (EU), where widespread dissatisfaction with the Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021 and imposes ESG disclosure requirements on financial firms and investment advisors, is evident.“Last summer, some of the big players said that they were planning to move the categorization of their funds under the EU’s SFDR from ‘dark’ green to ‘light’ green. It is no coincidence that this happened when the final EU rules came into force,” Ms. Cummings said.
U.S.-based firms such as BlackRock, State Street, and JPMorgan Chase have now registered their frustrations with an investment agenda that promotes a highly specific conception of social justice and sustainability at the expense of the traditional criterion of maximizing returns for shareholders.
Brian Domitrovic, a professor at Sam Houston State University in Texas specializing in business and financial history, views shareholder dissatisfaction with ESG criteria as a driver of this trend.
“It comes from both shareholder pressure against ESG and a sense that the money was not being well spent,” Mr. Domitrovic told The Epoch Times.
Mr. Steele at Hillsdale College concurs with Domitrovic about the awkward position that firms with ESG commitments ended up in and the impossible balancing act with which they found themselves saddled, as they strove to invest money according to arbitrary standards imposed from the outside while meeting their obligations to shareholders and avoiding lawsuits.
“Investment and asset management firms like BlackRock, State Street, and JPMorgan Chase have a fiduciary responsibility to clients. The UN Climate Action 100+ organization is imposing increasingly strict requirements on members and pressuring them to monitor other firms. I think this threatened these firms’ control over their own decisions and exposed them to liability for violating their fiduciary responsibilities,” Mr. Steele said.
Contrary to the claims of Climate Action 100+ that businesses can lower their exposure to climate risk by participating, evidence of the risk that climate change poses for most businesses is lacking, he said.
“These alleged risks cannot be quantified, certainly not at the level of a particular business, so it is hard to make a case for these programs,” Mr. Steele added.
Shocks to the System
It is not just that maximizing profits and supporting carbon-free services and products are two distinct imperatives, and supporting one might divert time and resources from supporting the other.Often, the imposition of ESG requirements had a direct adverse effect on equity and cryptocurrency prices and market performance.
That’s the view of Scott Rummler, the founder of ScalarSight, a New York-based data analytics firm that studies and predicts equity and crypto price movements.
When the International Sustainability Standards Board (ISSB) and the U.S. Securities and Exchange Commission (SEC) set forth guidance and rulemaking around ecological goals and requirements, it sends tremors through the stock markets, Mr. Rummler suggested. The consequences are evident in the faltering stock performance of corporations such as AMC Entertainment and GameStop, he said.
“Overall, I have seen correlations over the last three years between more stringent announcements from the ISSB, the SEC, and various banking publications, and increased volatility in the risk underlying equities and cryptos across the board,” Mr. Rummler told The Epoch Times.
“I’m looking at the quantum probabilities that undergird the markets, so I see patterns others do not. Unusually, much of this risk does not manifest in wild price swings the way one might expect. Occasionally, it bubbles to the surface with equities like AMC and GameStop,” he added.
The financial markets do not simply adapt to the rollout, augmentation, and tightening of ESG requirements. Rather, they perceive the advancement of such criteria as a threat to their business models and react accordingly. Mr. Rummler said he has tracked such patterns over time.
The phenomenon is not just heightened bearishness, but the perception of full-blown systemic risk.
“On several occasions, I have noticed dramatic, and sometimes chaotic, changes in these odds that tie back to the dates when there were changes in ESG requirements. These fluctuations typically correspond to an increased level of hidden risk that reverberates throughout the system,” Mr. Rummler said.
A Rock and a Hard Place
Because of legal obligations that the Department of Labor imposes on firms, the ESG imperative can mean, for many players in the market, “Damned if you do, damned if you don’t.”That’s the view of Jeffrey Hooke, a lecturer at Johns Hopkins Carey School of Business and former investment banker, who concurs with Mr. Steele and others about the severe conflict of interest that arises when firms put ESG criteria first.
“When you’re in the money management business, when you’ve got your advisers recommending stocks and bonds, there is a fiduciary obligation to get the highest return with the appropriate level of risk,” Mr. Hooke told The Epoch Times.
“Once you start injecting ESG politics into it, you’re somewhat in conflict with the fiduciary guidelines set forth by the Department of Labor and others. That’s apart from the responsibility to the stockholders of State Street and JPMorgan Chase,” he added.
A further complication is the lack of a universally agreed definition of what an ESG stock even constitutes, Mr. Hooke noted.
What a rigid commitment to ESG often comes down to is an effort to placate environmentalist groups and assure shareholders that the asset manager is not behind the curve when it comes to socially conscious investing, Mr. Hooke suggested. Those firms that invest in accordance with ESG criteria tend to lack a methodological basis for their decisions, he said.
During his career in investment banking, Mr. Hooke has closely followed the efforts of some firms and universities to position themselves as pro-ESG, and the lack of research to back up their stances and policies is striking.
“It’s one thing I noticed when I was doing a study a few years ago on oil and coal stocks. When these pension plans and university endowments say they’re going to pursue this policy, they never have a study alongside the recommendation. I have never heard of them presenting an independent study saying that ESG portfolios perform as well as others,” he said.
“All you’ve got to do is produce such a study, but I’ve never seen anybody do that,” Mr. Hooke added.
BlackRock and the Department of Labor did not respond by press time to a request for comment.
