From Euphoria to Disenchantment: BlackRock Cuts its ESG Investment

ESG is losing appeal. Sustainable investments have been in the focus of investors for the past few years. In the third quarter of 2021 alone, U.S. sustainable funds recorded $15.7 billion in net inflows, according to U.S. financial services company Morningstar. However, one of their main drivers has dampened their enthusiasm: BlackRock announced at its last shareholder meeting that they would be downgrading investment in ESG assets.

Specifically, the New York-based investment management company presented at its last shareholder meeting, held last week, a proposal in favor of limiting the number of investments in sustainable assets and reducing it in 2022 compared to the previous year’s investments.

Specifically, the note clarifies that BlackRock will support fewer investments in ESG (environmental, social, and corporate governance) assets than in 2021 “as we do not believe they are consistent with the long-term financial interests of our clients.” The company led by Larry Fink stresses in the document that it will not make investment decisions that “implicitly seek to micromanage companies.”

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BlackRock says it “no longer considers investments to be consistent with the long-term financial interests of our clients”

This includes investments that are “unduly prescriptive and constrain board or management decision-making and that require changes to the company’s strategy or business model or that address issues that are not material to how a company delivers long-term value to shareholders,” according to the document released by the company.

The fund manager will take its environmental strategy in another direction. In the same document, BlackRock says it will favor measures that improve a company’s disclosure of information that helps investors understand whether the company is well-positioned to adapt to climate-related changes. In addition, the fund will require companies to provide “specific quantitative” information on their emissions and reduction plans.

These are not the first voices in the United States pointing to a change of cycle in sustainable investments. A report by experts at Edhec Business School in the middle of last year and picked up by the Financial Times points out that the ESG investment market is reaching a state of maturity and could become a victim of its own success. “We will soon be at a stage where the relationship between ESG and performance will be negative, as it logically should be,” said Abrahan Lioui, professor of finance at the Edhech Busniess School and an expert on investment strategies and their impact on the environment.

The ESG investment market is reaching maturity and could become a victim of its own success

He noted that while investors may have initially benefited from companies’ interest in becoming more sustainable, it is likely that companies will now have to incur costs in trying to improve their social and environmental scores, which will result in lower returns in the long term.

It also pointed out that the ESG strategy can act as a bubble in the markets, raising the rating of companies without their profitability having improved. Even so, the study does not completely rule out sustainability-focused investments but points out that they should be practiced with investor returns in mind.

Although investments focused on ESG standards may lose appeal, a Deloitte report published last April states that they will account for half of all professionally managed assets by 2024. However, the company also pointed to a trend change whereby sustainable investments will no longer be a differentiator but a standard element to be taken into account in the decision-making process.

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(Featured image by Towfiqu barbhuiya via Unsplash)

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