What’s not to like about big investors taking a considered approach to the environment, our society and the internal governance of companies whose shares they buy? Plenty, according to some on the right.
Caught in the middle of this dispute are the Big Three asset managers — BlackRock, Vanguard and State Street — which collectively oversee more than $20 trillion in assets and cast more than a quarter of all votes at S&P 500 companies. Those in the anti-ESG crowd say these firms are prioritizing politics over returns, reflecting the undue influence of pension funds and foreign interests that themselves pursue an anti-United States and anti-capitalist agenda. They say ESG is shorthand for a woke hijacking of business interests, and its nefarious outcomes include blocking investment in oil and gas, tobacco producers, and gun manufacturers; demanding more diversity on corporate boards; and damaging American jobs.
The Big Three have also been criticized on the left, where they are said to be shirking their ESG responsibilities, cowardly avoiding standing up for what they believe in because of carping from the right. These critics point to an analysis showing that, over the past year or so, the big asset managers have reduced their support for ESG-focused votes at companies where they hold shares. (The asset managers argue that they have stood firm while the sands beneath them have shifted, that ESG-focused shareholder proposals have multiplied and become more hard-line.)
There are plenty of reasons to scrutinize the big asset managers in general. Performance is one. The fees they charge for essentially running index funds that invest in everything is another. Just how gargantuan they have become is yet another. Certainly, they have grown into pervasive shareholders that potentially wield enormous power, and the effects of that are worth ongoing consideration by lawmakers, regulators and everyone who has investments they run.
But many of the solutions to perceived ESG problems actually risk making things worse. On the right are those who seek to disenfranchise the big asset management firms, either by refusing to invest in them or by curbing their ability to vote on issues at the corporations where they own shares. Several conservative state legislatures last year pulled their money from asset managers in protest.
But such a blunt approach to limiting the Big Three’s influence could do the opposite of what is intended: Rather than depoliticize corporations and investments, it risks increasing the influence of political lobbying. The Big Three collectively employ hundreds of professionals to consider the impacts of ESG strategies — including on their investment performance. Ordinary retail or private shareholders lack the capability to do that, so their votes would be much more vulnerable to the persuasive power of special interest groups. Under the influence of one wealthy lobby group or another, shareholder votes could swing corporate strategy wildly. It’s unclear whether this approach would curtail woke decision-making or expand it.
The Big Three might not be perfect custodians of responsible investing, but removing their influence could lead to more politics and poorer performance. Already, there are several apps and sites that help individual investors band together, to collect their votes behind a common cause, often with a strong ESG influence. What’s more, studies show that some states’ efforts to withdraw money from the big asset managers have come at a significant financial cost.
On the left, meanwhile, publicly castigating the big asset managers on ESG, including calling for senior executives to resign, risks creating a bunker mentality that could lead the firms to disengage from the broader debate. It also generates heat that fuels ESG backlash.
The asset management industry is not the only battleground in the war over ESG. The Securities and Exchange Commission is under pressure from various interests as it considers corporate ESG reporting requirements, for instance. But the giant asset managers make for a convenient and unsympathetic target in the broader debate. Undoubtedly, the future of an ESG approach to investing lies partly with them. Removing political influence from investing decisions might sound sensible in these polarized times. But efforts to do so could achieve the exact opposite effect.