ESG Backlash Has Fund Clients Demanding Proof It Works

Lisa Pham
Tue, May 31, 2022,

ESG Backlash Has Fund Clients Demanding Proof It Works

(Bloomberg) -- Investment clients are demanding more evidence that ESG asset managers can deliver on their promises, amid a steady stream of criticism that the industry is on the wrong track.

“There’s a lot of pressure on investment managers to demonstrate the value that they’re getting out of their stewardship work,” said Peter Reali, managing director of responsible investment and engagement at Nuveen LLC, which oversees about $1.3 trillion. And when it comes to wider industry efforts to cut portfolio emissions, ESG investment professionals “definitely hear the complaints and concerns,” he said.

Environmental, social and governance investing has drawn an increasingly vocal chorus of detractors this year, with everyone from US Republicans to Elon Musk weighing in. But fund bosses are also facing more targeted criticism from ESG insiders, with notable highlights including hedge fund activist Chris Hohn’s recent diatribe against so-called ESG engagement strategies. At the same time, regulators are growing more explicit in their warnings that a crackdown is coming.

Against that backdrop, clients are asking more specific questions around things like proxy voting, and they want evidence that ESG engagement is actually “getting companies to move,” Reali said.

But despite much of the ESG industry’s focus on climate, the data suggest the investment industry isn’t really moving the needle. Last year, global CO2 levels rebounded to their “highest level in history,” the International Energy Agency said in March. Meanwhile, the ESG industry has surpassed $40 trillion in value, according to Bloomberg Intelligence.

Simon Rawson, director of corporate engagement at nonprofit ShareAction, said he’s seen relationships between asset managers and the companies in which they hold stakes sometimes get too comfortable.

“If they’re going to be robust stewards and challenge companies, they also need to be able to have courageous conversations,” he said. “And honestly, most of the time they aren’t prepared to compromise the relationship that they have with the company.”

In the current climate of ESG skepticism, “tea-and-biscuits engagement with companies just doesn’t cut it anymore,” he said.

Reali said Nuveen is trying to make it easier for clients to track and monitor how well near-term ESG targets are being met. Having a 2050 net-zero emissions goal “is worthless without interim targets, interim goals and progress reporting,” he said. “The systems have to be built now. I think people are really underestimating the challenge we’re facing here.”

Mirza Baig, global head of ESG investments at Aviva Investors, said it’s “difficult to argue that, as an industry, we have done enough.” Despite the rhetoric, “in too many areas, we are still operating on a business-as-usual basis, while bolting on renewables and energy efficiency initiatives.”

Baig singled out a tendency in the industry to rely on the environmental metric of carbon intensity, whereby a company’s carbon footprint is measured as a percentage of the total.

“The problem is absolute emissions levels continue to rise,” he said. “This strategy of continuing to invest substantial sums in brownfield oil and gas sites, but then supplementing that with lower carbon solutions, in aggregate will take us further away from a Paris Aligned energy mix in the future.”

While it’s important to approach the subject of decarbonization “with a degree of realism,” the ESG industry needs to ask itself whether it’s done enough and at a fast enough pace, Baig said.

“I think we can all objectively say it hasn’t,” he said.

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