Campaign against ESG isn't dissuading asset managers

Even as the CEO of the world’s biggest asset manager says he's all but shunned the term “ESG” amid extreme political divisiveness, fund companies are prioritizing it and see its role expanding in more of their portfolios.

That's according to results of a global survey published Tuesday by the Index Industry Association, which in March and April queried 230 chief financial officers, chief investment officers and portfolio managers, including 80 based in the U.S.

The group found that 88% of U.S. fund managers have seen environmental, social and governance criteria become more of a priority over the past year — representing the highest rate in the world, tied with the U.K. Globally, just over 80% of asset managers said the same, while about 10% said it has become less important over a year, the association found.

Currently, ESG is used in about 40% of asset managers’ strategies, and the companies polled said they expect that to surpass 60% in less than 10 years.

Those findings come just days after BlackRock CEO Larry Fink said in a talk at the Aspen Ideas Festival that he now avoids using the term ESG, which he said has been weaponized and mischaracterized by both the political left and right. This year, U.S. Republicans have intensified a war on the subject, pushing a bill through Congress that would have reversed a new Department of Labor rule on using ESG in retirement plans, had it not been vetoed by President Joe Biden.

That trend has snowballed amid a wider culture war over the role of corporations in promoting social and environmental responsibility. Accusing numerous public companies of fostering liberal agendas, conservative groups have promoted boycotts on products, the most prominent of which has been Bud Light.

But that hasn't necessarily translated into less demand from fund investors that companies to include sustainability data as part of their investment process. And despite allegations that ESG considerations are bad for companies’ bottom lines, the performance lag that sustainable funds saw over the past year appears to have reversed itself, buoyed by higher concentrations in tech stocks and lower ones in carbon-intensive energy holdings.

The financial professionals surveyed cited several factors that they expect to drive wider use of ESG over the next few years, including climate change, social upheaval, corporate governance reform, new regulations, technological advancement and increased demand from clients, according to the Index Industry Association report.

However, impediments to wider use of ESG remain, with the lack of ESG in a variety of asset classes and standardized data across markets cited by 32% and 30% of respondents, respectively. Other culprits are insufficient data (29%) and inconsistency in ESG ratings and methodologies by data providers (24%), the report found.

Those hurdles could be addressed soon, with the Securities and Exchange Commission this year expected to publish its final rule for climate-related disclosures for public companies. It's not clear whether that regulation will cover the wide-ranging Scope 3 greenhouse gas emissions as proposed, which include everything in companies’ supply chains and end users. However, the state of California is poised to pass its own law that would supersede the SEC’s requirements and thus mandate climate reporting, even if the SEC’s rule is challenged in court.

In addition, the International Sustainability Standards Board Monday published the first set of voluntary standards for companies to use to report climate information, which could help bring more consistency to the ESG data corporations include on their financial reports.

More data could simply also be available, asset managers said in the survey. Among technological factors that could play a role in expanding information, 43% of respondents separately pointed to big data analytics and the “internet of things,” while geospatial technologies and blockchain were both cited by 42%.