Political and regulatory pressures appear to have taken their toll. Four American financial giants (JPMorgan, BlackRock, State Street and Pimco) with trillions of dollars in assets have abandoned or reduced their participation in Climate Action 100+, the largest initiative by investment groups and major corporations to reduce emissions and combat global warming.
“Views on sustainability or ESG practices, particularly those related to climate issues, have become political issues that can increase reputational risks,” State Street notes in its annual report filed this week with the United States Securities and Exchange Commission Securities and Exchange Commission) was registered (SEC). “They’re giving in to the climate deniers,” says one Democratic official.
Sustainable investing criteria, or ESG, an acronym for environmental, social and governance, is at the center of an ideological and political battle in the United States. Republicans have increased pressure against such criteria on several fronts. The New Hampshire state legislature's most recent proposal was to make it a felony in some cases. The initiative was rejected, but there are states that veto the management companies that apply it and there is also pressure from Congress.
House Judiciary Committee Chairman Jim Jordan and two other Republicans sent letters to executives at State Street, BlackRock and Vanguard asking them to clarify their environmental, social and governance (ESG) practices. In the letters, the congressmen suggested that the companies were violating US antitrust laws by entering into collusive agreements to “decarbonize” assets under management and reduce emissions to net zero. The focus was on membership in groups such as Climate Action 100+.
On the one hand, this organization includes about 700 investors, but these four giants represented $14 billion, about 20% of the total. On the other side are companies. Investors include Spanish fund managers from Santander, CaixaBank and Ibercaja. As for the companies, the Spanish companies present are Iberdrola, Naturgy and Repsol.
The withdrawal of the financial giants does not mean that the companies are denying the fight against climate change, but it does mean that they are distancing themselves from the guidelines that the group has set in their actions. Last year, Climate Action 100+ established new, stricter guidelines to help investors be more active in demanding emissions reductions. The companies point out that by leaving they want to preserve their autonomy and freedom of choice vis-à-vis companies.
Political division
After the initial announcements, Congressman Jordan celebrated: “The decisions by JPMorgan and State Street are major victories for freedom and the American economy, and we hope that more financial institutions follow their lead and forego collusive action on ESG issues,” he said tweeted.
New York's municipal comptroller, Democrat Brad Lander, criticized him: “Climate risk is financial risk. Today, BlackRock, JPMorgan and State Street are choosing to ignore both,” he said in a statement. “By bowing to the demands of right-wing politicians funded by the fossil fuel industry and withdrawing their commitment to Climate Action 100+, these giant financial institutions are violating their fiduciary duty and siphoning off billions of dollars from their customers’ assets.” € he added. “They are giving in to the climate deniers,” he concluded.
Lander was particularly critical of BlackRock, whose boss Larry Fink declared three years ago that climate risk was a financial risk, putting him at the forefront of climate investor activism. The company has not completely left the Climate Action 100+ group, but has made way for the international department. BlackRock is a major shareholder in dozens of Spanish companies, including Iberdrola and Repsol, and with the purchase of GIP it will also become a major shareholder in Naturgy.
BlackRock had already issued an initial warning in its 2022 annual report that something would change. “ESG criteria and sustainability are the subject of increased regulatory attention in all jurisdictions,” it warned. “Some states or state officials in the United States have adopted or proposed laws or taken official positions that would prevent or prohibit state public entities from doing certain business with entities that the state has determined to be “boycotting” or “discriminatory” against certain sectors have taken ESG factors into account in their investment and board voting processes. “Other states and localities may adopt similar laws or other laws and positions related to ESG criteria,” it said.
Another problem for large investment firms is the different perception and regulation in the USA and Europe. State Street explicitly acknowledges this in its annual report: “The general expectations of our stakeholders, including regulators and customers, outside the United States, particularly in Europe, regarding sustainability or ESG issues may differ materially from those in the United States “Because we conduct our asset management activities globally, conflicting global expectations in the United States and outside the United States complicate our ability to mitigate risk,” he explains.
ESG criteria have changed sign in the risk sections of listed companies. Before, the risk wasn't in taking them over. Now they or both are applied at the same time. “Activists have taken actions aimed at changing or influencing JPMorgan Chase's business practices related to ESG issues, including public protests at JPMorgan Chase headquarters and other locations and the submission of specific ESG-related proposals for voting by the JPMorgan Chase shareholders said in their annual report.
“The fiduciary, anti-competitive, voting rights, governance and other issues raised by ESG investment strategies continue to be the subject of legislative and regulatory debates around the world, particularly at the federal and state levels in the United States,” State said Street notes that this section highlights the regulatory and political scrutiny to which the company is subject. “Some US officials have suggested that investment practices related to sustainability or ESG could lead to violations of laws – including antitrust laws – and breaches of fiduciary duty,” he admits.
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