- Investors are showing decreased concern for ESG, with only 38% considering them in new investments, down from 44% in December 2021.
- Treasury teams are finding it difficult to push the sustainability agenda as they struggle to fund themselves in the current environment.
- BlackRock, State Street and Capital Group – all prominent members of the Net Zero Asset Managers initiative – have massively increased investments in oil and gas.
Investors are losing interest in sustainability. It may have been the trend of the early 2020s, but much like the Rubik’s cube, Tamagotchi or Fortnite (pick your generation), it was a dalliance whose time has passed and, apparently, should be put back in the closet.
Right-wing British journalist Fraser Nelson captured this ennui when he wrote in the Daily Telegraph last week about the “dark green agenda” fading across Europe. Certainly, several recent surveys have suggested that it is no longer a priority.
Research published on 18 May from financial service group Charles Schwab suggests British investors are less concerned by environmental, social and governmental (ESG) factors in their investments than they were two years ago. Led, unsurprisingly, by the Boomer generation, which is the least likely to take ESG factors into consideration when investing, the number of investors who consider ESG when making new investments has dropped six percentage points since December 2021 to 38%.
“Fewer investors seem to be factoring in ESG-related considerations into their investment decisions,” says Charles Schwab UK’s managing director Richard Flynn.
It has certainly dropped down the business agenda.
Google Cloud’s second annual Sustainability Survey showed ESG efforts have fallen from the primary organisational priority last year to third place this year. And Herbert Smith Freehills’ annual Corporate Debt and Treasury Report found that contrary to predictions last year, where 70% of respondents expected to enter into sustainable finance, fewer respondents this year reported having a sustainability framework (26%, down from 29% last year) or sustainable finance (18%, down from 20% last year) in place.
“This seems to suggest a stalling in what many had anticipated would be a persistent continual upward trend for sustainable finance,” says the firm’s head of corporate debt finance, Kristen Roberts.
The struggle to maintain the commitment
In one sense, this shift is understandable.
In the Google Cloud survey, executives point to the macroeconomic environment and pressure from external parties to cut corners in their sustainability initiatives and prioritise client relationships and drive revenue. Those polled by Charles Schwab do the same.
It is significant that in December 2021, more than half (55%) of investors prioritised ESG investments, regardless of whether they underperformed or not. Two-thirds (67%) now prioritise returns over choosing sustainable investments. Economic pressure is also weighing on the companies themselves.
“Treasury teams are challenging the role of debt finance in driving the sustainability agenda in the light of the need to get financings done in the current environment,” says Roberts.
It is, however, hard to reconcile the challenges of maintaining the first flush of love for sustainability with rejecting all for which it stands.
A May report from London-based not-for-profit think-tank Carbon Tracker shows the extent to which asset managers have increased their holdings in the 15 largest oil and gas companies.
Russia’s invasion of Ukraine saw oil and gas prices soar in the early part of last year. This meant windfall profits for oil and gas companies and made them appear as attractive investment opportunities.
But the level of investment has been significant with many asset managers “doubling down”, as the report says, on oil and gas.
It is perhaps unsurprising that the perennially tone-deaf asset manager Vanguard should have increased its stakes in oil and gas majors by almost 60%. The $7.2trn AUM firm has never given a fig about sustainability.
Asset managers’ credibility under fire
But the next three asset managers on Carbon Tracker’s list are all members of the Net Zero Asset Managers (NZAM) initiative, a collective of fund managers committed to reaching net-zero emissions targets by 2050.
Members have long struggled to prove their commitments to ESG, but BlackRock ($8.9trn AUM), State Street Global Advisors (SSGA) ($3.4trn) and Capital Group ($2.2trn) have all increased their investment in oil and gas by 62.5%, 50.9% and 40.6% respectively over the past year.
It is difficult to reconcile that with, for example, Capital Group’s claim for its “long-held commitment to responsible stewardship of our clients’ assets”, or BlackRock’s statement that “in our experience, companies that effectively manage material risks and opportunities in their business models, including those related to sustainability, are better positioned to deliver durable, long-term financial performance”.
There was at least a hint of honesty from Ron O’Hanley, chairman and chief executive of SSGA. “Divestment pressure will actually, I think, slow down this transition as opposed to accelerate it,” he said, speaking at the 2023 Milken Institute Global Conference in Los Angeles in early May.
The frustration with the asset managers is palpable.
“Growing numbers of investors want to support this transition and are seeking to align their portfolios with 1.5°C. However, it’s hard to see how they can do this with credibility if they own financial interests in oil and gas companies that are not themselves aligned with the Paris target,” said Mike Coffin, Carbon Tracker’s head of oil, gas and mining as well as the report's co-author.
He’s right. These asset managers have set potentially fire to what credibility they had given the news last week that they are directly funding climate change.
The World Meteorological Organisation said there was a 66% chance of missing the Paris Agreement’s aim to limit global warming to 1.5 degrees, and that temperatures are likely to surge to record levels in the next five years, fuelled by heat-trapping greenhouse gases and a naturally occurring El Niño event.
But as long as the asset managers make their returns, that’s alright.[Read more: Responsible investing: ShareAction rates the top 77 asset managers]