Hundreds of Extinction Rebellion protesters have been arrested for civil disobedience in recent weeks; Greta Thunberg was a favorite for the Nobel Peace Prize; numerous governments have declared climate emergencies — all part of a worldwide call to action in the battle against global warming. Unfortunately, this energy and sense of urgency is not shared by the institutions most responsible for the impending climate catastrophe: the world’s largest corporations and their powerful investors.
Despite BlackRock CEO Larry Fink’s 2018 letter to CEOs imploring companies to “serve a social purpose” and the Business Roundtable’s promise to value all stakeholders, a recent study found that just thirteen shareholder proposals on environmental issues reached a vote at companies in the S&P 1500 Index in the past year. Findings just released by the Guardian show that big-money managers such as BlackRock, Vanguard, and State Street “used their votes to frequently oppose efforts to improve climate-related financial disclosures.”
Shareholder resolutions aren’t legally binding, of course, but the idea that “shareholder governance” — particularly through the leadership of large fund managers — can pressure companies to adopt sustainable practices has seen renewed excitement.
Increasingly, big investors and fund managers are positioning themselves as ethical intermediaries at the center of a new movement for “impact investing” — investments that claim to prioritize environmental, social, and governance concerns. BlackRock, Invesco, Aberdeen, and Vanguard — all of whom who have signed on to the UN-supported Principles for Responsible Investment — promise that they can help align people’s money with their values.
“Socially responsible investing” has been around for decades, but it’s taken off recently. Sustainable assets under management are now estimated to be around $30 trillion. So-called green bonds — fixed income instruments used to fund green projects such as wind farms or low-impact housing — have proliferated. Even entire countries — Belgium, France, Poland, Indonesia — are issuing them.
Meanwhile, companies like Vanguard have set up new “green” exchange-traded funds that exclude oil and gas companies and nuclear power. Although funds that avoid “sin stocks” (adult entertainment, alcohol, tobacco, weapons, gambling) are an old idea, their pivot toward supposed green investments has proven extremely popular, fueling an expansion worth hundreds of billions of dollars.
How, you might ask, do investors and money managers determine if a company is really green? Back in the ’90s, the small number of investors interested in “corporate social responsibility” used metrics provided by the Global Reporting Initiative. These days CSR (corporate social responsibility) has been replaced with ESG (environmental, social, and governance) numbers that include data on emissions, labor practices, diversity, board independence, and supply chain information — the vast majority of which is self-reported by companies.
There are more than 150 ESG ratings systems used by companies worldwide that include thousands of bespoke, non-comparable performance metrics. As investors and fund managers have become more interested in ESG metrics, and governments and regulatory agencies consider the possibility of mandating that companies produce and disclose ESG data, a cottage industry of ESG metric providers has popped up. The emerging sector is worth an estimated $200 million and set to grow to $500 million in the next five years.
With little government oversight and a lot of money on the table, the scramble to supply the chosen ESG yardstick is getting fierce. On top of widely recognized metrics offered by the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Task Force on Climate-Related Financial Disclosures, other big players are getting into the game. Moody’s bought Vigeo Eiris and Four Twenty Seven, two ESG ratings and research firms, while the S&P is putting together its own ESG ratings business. Not to be left out, Harvard Business School and a European venture capital firm are developing the “Impact-Weighted Accounts Initiative” to generate a unified system of measures that all companies can use.
The possibility of more widely available “green” assets graded according to standardized global metrics has investors and money managers seeing dollar signs. Not only are these assets extremely popular, but a green label could potentially qualify them for special treatment from regulators. The European Commission, for example, has suggested that in the future, certified green investments could be subject to lower capital requirements, making it cheaper for banks and investors to fund these types of assets.
So is tackling climate change simply about getting the incentives right? Is a more robust, standardized market in ESG metrics the key to reaching global emissions targets? Unfortunately not, for at least two reasons.
The first reason is that, just as companies are not compelled to honor shareholder resolutions, large investors and fund managers are not our allies. According to FundVotes, a project that tracks proxy voting, BlackRock, Invesco, BNY Mellon, and Vanguard have all voted against shareholder resolutions raised at ExxonMobil’s and Chevron’s annual meetings aimed at increasing corporate disclosures on climate change. The Guardian’s recent investigation confirms this finding: “BlackRock and Vanguard opposed or abstained on more than 80 percent of climate-related motions at FTSE 100 and S&P 500 fossil fuel companies between 2015 and 2019.”
The explanation for money managers’ unwillingness to use their clout to spur the transition from fossil fuels is simple: they have huge investments in dirty energy companies. BlackRock, Vanguard, and State Street, the three biggest fund managers, boast “a combined $300 billion fossil fuel investment portfolio” — a portfolio that has grown nearly 35 percent since 2016.
A second reason why we can’t rely on market mechanisms to solve climate change is that, right now, a “green” label on funds and bonds has no legal basis — and companies and their political allies are working hard to keep it that way. If green funds and bonds invest in companies and projects that are not actually green, there are no legal repercussions, only reputational repercussions. In just one example of how investors are routinely misled, a $500 million Vanguard exchange-traded green fund was recently found to have investments in oil and gas companies despite promises to the contrary. And, because there are so many ESG metrics, just about any company can market itself as green — hence “green” fracking companies.
Even insiders recognize the limits of green capitalism. As Hans Hoogervorst, the chairman of the International Accounting Standards Board, put it recently: “We should not expect sustainability reporting to be very effective in inducing companies to prioritize planet over profit . . . Greenwashing is rampant.”
Self-reports, ratings systems, and the supposed green intentions of the world’s largest money managers won’t curb the voracious appetites of the world’s biggest corporations. ESG metrics and impact investing are mostly hype — an opportunity for “woke” capitalists to cash in on our desire to preserve the planet for future generations. Corporations are trying to hijack the climate justice movement. Only a bold, large-scale, people-centered movement can stop them.