Asset managers fear ‘public shaming’ as anti-ESG lobby grows
Morningstar’s global head of sustainability research Hortense Bioy told NZI asset managers are increasingly ‘softening' their ESG language
Large asset managers fear ‘public shaming’ of putting forward climate-conscious stances in light of a growing anti-ESG movement from some investors and legislators in the US, an industry insider told Net Zero Investor today in an exclusive interview.
Hortense Bioy, head of sustainability at US financial services and funds rating firm Morningstar, said that “[large asset owners] are softening the language and ESG claims they are making."
She shared with NZI that "it's clearly a political and competitive landscape that is difficult for all asset managers to navigate, especially for large managers like BlackRock."
Bioy singled out the US-based asset management giant, due to both its size and having a wide range of customers across geographies with greatly varying appetite for ESG considerations in investments.
In January, the US state of Kentucky warned 11 large financial institutions including Schroders, BlackRock and JPMorgan Chase that they will be subject to divestment if they continue to “boycott” fossil fuel companies.
Vivek Ramaswamy, co-founder of the anti-ESG Strive Asset Management, also announced a presidential run as a Republican candidate in February.
Anti-ESG pressure
Bioy expressed fears over the future of organisations such as the Climate Action 100+ and the Net Zero Asset Managers Initiative (NZAMI) in the wake of criticism of the organisations from those with an anti-ESG bent. Late in 2022, Vanguard exited the NZAMI.
“Large asset managers may not be able to stay part of those initiatives going forward, given the pressure there is from politicians who are trying to pull every legal lever to get them into trouble.”
In March, conservative non-profit Consumers Research published a report titled “defeating the ESG Attack on the American Free Enterprise System”.
Within the report was a checklist of questions anti-ESG investors should ask of asset managers and proxy advisers, including listing which environmental or social activist groups they have been a member of, including Ceres, Climate Action 100+, and the NZAMI
“[ESG] is clearly a political and competitive landscape that is difficult for all asset managers to navigate.”
Bioy also touched on a familiar bugbear in the ESG space, which is continuing concerns over the quality of the data provided and gaps in what can be assessed by investors.
Things may be looking up this year, with the development and rolling out of disclosure and labelling regimes such as the Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Disclosure Requirements, and the Taskforce on Nature-related Financial Disclosures.
However, Bioy pointed out that, with the exception of TCFD in certain jurisdictions, many of these reporting regimes are voluntary rather than mandatory.
“There's still gaps in ESG data, and the data is not necessarily consistent and comparable," said Bioy, explaining "that's because when companies disclose on a on a voluntary basis they can pick and choose metrics they want to report on.
"In recent years, investors have been putting pressure on companies to disclose more, and also provide the data that they need”, she added.
There is also developments such as the Corporate Sustainability Reporting Directive (CSRD), which applies to large companies based in the EU or with an annual turnover of above €150m in the EU.
The CSRD includes standards that will consider ‘double materiality’, namely how a company both impacts and is impacted by climate change, and to report Scope 3 emissions.
The legislation passed in November 2022, and companies must submit their report aligning with the CSRD on 1 January 2025 for the 2024 financial year.
Bioy also notes that disclosure has improved through engagement, but this has been focused on larger companies as does the CSRD, and serves as further reminder that greater mandatory reporting standards may be a benefit.
‘Greenwashing’ bonds
As well as an influx of regulation and industry-led disclosure standards, another development in the sustainable finance space comes from the green bonds sector.
Such bonds took a hit along with the rest of the fixed income world in 2022, but as they begin to realise greater returns once more they are also coming under greater scrutiny.
“Green bonds, but also transition bonds, sustainability linked bonds and equivalent labelled bonds have gained popularity in the last two to three years. That will certainly continue, and there will also be debate around the additionality and greenness of these instruments as some people think a lot of it is greenwashing," Bioy said.
There's going to be more scrutiny of the projects and the assets that are behind green bonds.
challenge for investors will be scrutinising green bond issuance across a wider range of jurisdictions, particularly when frameworks may not match themselves to something such as the ICMA Green Bond Principles or the EU Taxonomy on Sustainable Finance.
In February, it was reported that green, social, sustainable and sustainability-linked bond market issuance will reach up to $40bn across Latin America in 2023, a revival from last year's drop-off.
India also released its first sovereign green bond earlier this year, and research from the Climate Bonds Initiative has suggested that China’s green debt market is world’s fastest growing.
“You can't make the world green overnight. You have to go step by step, progressively in the right direction. These bonds are interesting instruments, and they can really help investors in time”, Bioy concluded.
