The Shift in ESG Support: A New Era for Major US Asset Managers

In a significant shift that reflects the changing political and economic landscape, the three largest asset managers in the United States—BlackRock, State Street, and Vanguard—have notably reduced their support for Environmental, Social, and Governance (ESG) proposals during the latest voting season. This trend comes amid increasing Republican pushback against ESG investing, a strategy that has gained traction over the past few years but is now facing scrutiny and resistance.

The Decline in ESG Support

According to a recent report by Bloomberg, BlackRock, State Street, and Vanguard collectively control about 20% of the shares in all S&P 500 companies. However, their backing for ESG resolutions has waned significantly compared to previous years. For instance, BlackRock, which manages approximately $10.5 trillion in assets, voted in favor of only 4% of environmental proposals in the year ending June 2024, a drop from 7% the previous year. This decline is echoed by State Street, which supported 6% of environmental proposals and 7% of social proposals in the first half of the year, both lower than the previous year. Vanguard, managing around $7 trillion, reported not backing any environmental resolutions at all.

The Rationale Behind the Shift

The rationale provided by these asset managers for their reduced support is multifaceted. BlackRock’s 2024 proxy voting report indicated that many climate proposals were deemed "over-reaching," lacking economic merit, or unlikely to enhance long-term shareholder value. CEO Larry Fink, who has historically championed ESG initiatives, has recently distanced himself from the term "ESG," citing its polarizing nature and the backlash from conservative states. This shift in rhetoric comes in the wake of investigations by 19 state attorneys general, who allege that BlackRock’s ESG policies have adversely affected the American energy sector.

State Street and Vanguard echoed similar sentiments, arguing that the ESG proposals have become increasingly "prescriptive" and "complex," failing to address financially material risks to shareholders. This perspective aligns with a broader trend where even some pro-ESG resolutions are criticized for being poorly worded or lacking clear benefits for shareholders.

The Political Climate and Its Impact

The current political climate has played a crucial role in this pivot. Republican politicians have aggressively criticized ESG initiatives, labeling them as part of a "woke" agenda that imposes a politically liberal framework on corporate governance. This backlash has intensified, with state pensions in Texas and Florida withdrawing funds from BlackRock, signaling a growing trend of political influence over investment strategies.

The decline in shareholder support for environmental and social resolutions has been stark, dropping to 19% in the latest proxy season from approximately 22% the previous year. This shift mirrors a broader change in corporate priorities, as CEOs increasingly focus on pressing issues such as inflation, artificial intelligence, and geopolitical tensions, relegating sustainability to a lower priority.

The Response from the Business Community

The response from the business community has been mixed. While some companies continue to advocate for sustainability and ESG goals, others have succumbed to pressure from conservative activists. Figures like Robby Starbuck have spearheaded campaigns against diversity, equity, and inclusion (DEI) initiatives, threatening boycotts against companies that do not comply. This has led to significant reversals in corporate policies, with companies like Tractor Supply, Harley-Davidson, and Ford scaling back their DEI efforts in response to public outcry.

A Divergence from Global Trends

Interestingly, the voting records of the top three US asset managers stand in stark contrast to their European counterparts, who continue to prioritize sustainability goals. This divergence highlights a growing rift in investment philosophies, with US firms retreating from ESG commitments while European firms maintain their focus on sustainable investing.

Conclusion

The retreat of BlackRock, State Street, and Vanguard from supporting ESG proposals marks a pivotal moment in the investment landscape. As political pressures mount and shareholder priorities shift, the future of ESG investing in the United States remains uncertain. While the push for sustainability and responsible investing continues to resonate with many, the current climate suggests a challenging road ahead for those advocating for these principles. The evolving dynamics between asset managers, shareholders, and political forces will undoubtedly shape the trajectory of ESG investing in the years to come.