While some US banks and money managers have dropped references to the three letters, the financial industry has not lost focus on the opportunity to profit from climate-related investments.
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Published July 17, 2024 • 6 minutes of reading
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(Bloomberg) — At Institutional Investor, Wall Street’s version of the Oscars for financial analysts, the winner in one of this year’s categories was — nobody.
The red carpet is officially rolled out for the three letters, ESG. 57 years II has dropped the label, an abbreviation for environment, social and governance, from the annual analyst rating.
In its place is “sustainability”, a synonym used by many banks and money managers, amid increasingly politicized debates about climate change and corporate diversity in the US. This is the day for ESG in American finance. The label, which emerged from obscurity only to be hyped by Wall Street and then attacked by Republican politicians, is being scrubbed from some investment products and project titles.
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“Banks are not what they were in the boom days,” said Michael Karp, who runs the recruitment firm Pilihan Group in New York.
Financial companies have navigated a difficult path in the US over the past two years. He is less vocal on topics like climate change in order not to anger the oil-rich red countries, but he is not silent so as not to alienate clients in blue countries and cities, as well as in Europe, where ESG – both the term and the investment business – remain a powerful force.
At stake are more than a few letters: The historic hurricane that battered the Caribbean and then Texas, and the recent wildfires in California show the gravity of the overheating planet. And this is driving demand for niche but fast-moving ESG investments, including climate transition funds and debt instruments such as disaster bonds, where issuance is at its highest.
In addition, global investment in the energy transition increased by 17% last year to a record $1.8 trillion and the figure continues to grow, according to researchers at BloombergNEF. The US posted “strong growth” in 2023, spending $303 billion, BNEF said.
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While some US firms, including Neuberger Berman, are sticking with ESG, others say the label is waning. Jefferies Financial Group Inc. has replaced ESG in the analyst’s job title with the words “sustainability and transition.” Wellington Management Co and Lazard Asset Management have cut projects. Bank of America Corp has reorganized its ESG team and integrated the group’s activities with clean energy.
Representatives for the company declined to comment or did not respond to messages seeking comment.
The narrative around ESG has certainly changed. Bank leaders, who spoke of a “zero” emissions goal some time ago, continue to do business with fossil fuel companies. State Street Global Advisors and other investment giants have abandoned the group they created to fight global warming. Investor support for environmental and social shareholder proposals has declined, and mentions of climate change, as well as diversity, equity and inclusion, or DEI, are now less common on corporate conference calls.
Other issues for ESG include seminal climate rules from the U.S. Securities and Exchange Commission being challenged in court and the Federal Reserve, which have hampered efforts to make environmental risk a focus of global financial regulation. Another big worry is the possibility of a second Trump administration that will be even more hostile to climate initiatives and environmental regulations than the first.
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Perhaps most importantly, wind and solar, a large part of the green energy field, are just bad investments lately. The S&P Global Clean Energy Index has fallen more than 50% from its peak in early 2021, even as the S&P 500 rose to a record high.
Not surprisingly, US funds with ESG objectives are not favored. Despite gains in the broader stock market, the sector’s assets fell to about $335 billion from a peak closer to $365 billion by the end of 2021, according to researchers at Morningstar Inc.
And investors withdraw their money faster. In the first three months of this year, they withdrew a record $8.8 billion from the fund, marking the sixth consecutive outflow, Morningstar reported. Industry malaise also forced hedge fund manager Jeff Ubben to close his sustainable investment fund late last year, saying his strategy had not been rewarded in financial markets.
At the same time, the promising ESG bond business has been heating up for Wall Street underwriters. About $38 billion of ESG-related corporate bonds were issued in the US in the first six months of the year, down from $70 billion in the first half of 2021 when the industry stagnated.
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Institutional Investors, for their part, are simply following industry leaders as they say, according to David Enticknap, who runs II Research. “Despite the perceived backlash against ESG terms, we know that most sell-side companies have retained some analysts in the field,” Enticknap said in an email. Changing the category to “sustainability” made sense, he said. Since the label was coined by United Nations staff two decades ago, it has often confused people inside and outside the financial industry because it covers a wide range of overlapping topics. That hasn’t stopped Wall Street from using ESG to sell everything from mom-and-pop investment funds to complex financial products.
The industry has been “dominated by people who are only focused on short-term financial interests,” said John Streur, a champion of socially responsible investing since the 1990s who stepped down in March as chief executive officer of Calvert Research and Management.
“We’re still niche, let’s face it,” says Streur, who is currently working on an ESG data project.
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After ESG topics such as labor strikes drove down shares of US automakers and wildfires in Europe devastated the tourism industry last year, investors couldn’t resist the label.
“If we don’t have ESG, company valuations will be bumpy and there may be events that drive companies out of business,” said Alison Taylor, who teaches sustainability at New York University.
But few US companies remain educated on ESG topics. Jim Coulter, co-founder of private equity giant TPG Inc., is featured in a video posted on the company’s website titled “Capital and the Climate Revolution.” JPMorgan Chase & Co. and Citigroup Inc. ranks among the top global green bond underwriters this year, while Bank of America, Neuberger Berman and Wells Fargo & Co. sponsored conferences in New York and Chicago last month that focused on ESG topics.
And while BlackRock CEO Larry Fink — a target of GOP officials for promoting ESG — has stopped short of mentioning the label, George Walker, who runs Neuberger Berman, isn’t shy. The second cousin of former US President George W. Bush said the New York-based firm “is at a loss” in understanding how investments can be managed responsibly without regard to ESG risks and important financial opportunities.
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The term ESG has been used imprecisely in the industry, creating the perception that “those who embrace it have a social or even political agenda,” Walker wrote in Neuberger’s annual report. The company’s only agenda is to meet the client’s goals, and “always requires us to be aware” of all financial risk exposures, he said.
Walker also pointed to a New Hampshire bill introduced earlier this year — and quickly rejected — that seeks to criminalize the use of ESG factors.
The incident, he said, “speaks to a moment of hyperpolarization and politicization of the issue.”
—With help from Caleb Mutua.
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