“Move on From ESG,” Urges Former BlackRock Exec
Paul Bodnar says the backlash against the controversial moniker in the US means it’s time to think beyond the concept.
Sustainable investing has outgrown the catch-all ‘ESG’ label and the financial world should move beyond it, according to former BlackRock global head of sustainable investing Paul Bodnar.
That does not mean ditching sustainable investment altogether, as ESG’s political opponents in the US might wish, said Bodnar, who now works for Amazon founder Jeff Bezos’ philanthropic climate venture the Bezos Earth Fund, as Director of Sustainable Finance, Industry, and Diplomacy.
Instead, it means developing more sophisticated, multifaceted approaches to sustainable investing.
“I think the world needs to move on from ESG as an integrated concept,” Bodnar argued at the E3G-hosted State of Politics Forum in London on Tuesday. “There are not many use cases for having one ESG score for a company that tries to sweep all these various factors into a single [measure]. So I think the financial sector will move on and innovate in sustainable investing.”
Bodnar was a senior executive at BlackRock, the world’s biggest asset manager, between 2021 and 2023. That period marked the beginning of the ESG backlash in the US, when opponents began objecting to institutional investors excluding fossil fuels and championing so-called ‘woke’ causes.
BlackRock CEO Larry Fink had been a vocal supporter of ESG and pro-climate investment, and the US company became a prime target for anti-ESG attacks.
“I experienced this directly when I was at BlackRock, and it was really amazing to see how quickly the momentum in favour of sustainable investing ground to a halt and started to reverse,” said Bodnar, who’s curriculum vitae also includes two years as an adviser on climate and energy to former US president Barack Obama.
According to him, there were two angles to the ESG backlash – one positive, and one damaging. The positive one related to growing sophistication among investors.
“There was a healthy reckoning within the financial markets over what ESG means, and what it’s good for, and what you should use it for,” Bodnar said.
ESG was initially developed to price in factors that did not appear on a company’s financial reports, but then “ESG data sets started to be used by those who were interested in financial products that enhanced sustainability objectives or outcomes in the world, and the two got mixed up,” he said.
That left confusion over whether ESG referred to the impact of environmental, social and governance factors on a company’s profitability on the one hand, or the company’s impact on society and the environment on the other. Under the EU’s Corporate Sustainability Reporting Directive (CSRD) double materiality assessment, reporting on both is required, he said.
While questions of definition and purpose would “sort [themselves] out over time”, Bodnar said the political side of the ESG backlash – which is especially strong in the US – had taken on a life of its own. It originated in the aftermath of the Covid-19 pandemic and Russia’s invasion of Ukraine when demand for, and prices of, energy commodities soared. That meant funds that excluded fossil fuels underperformed those that didn’t.
“That really spooked a number of investors who were starting to get comfortable with tilting away from conventional energy,” he said. “I think we’re still experiencing that.”
This opened ESG strategies to criticism, and led to them being “plucked out and made into a political artefact”, Bodnar said.
“The political stuff is on its own track now,” he added.
The Trump effect
The ESG political backlash has been an overwhelmingly American phenomenon, with climate change being a particular divisive issue in the country.
Recent analysis by the Institute of Energy Economics and Financial Analysis (IEEFA) found net outflows in US-based ESG funds of US$8.8 billion in the first quarter of 2024. But in Europe, where climate change is largely accepted across party lines as a grave threat, ESG funds saw net inflows of US$11 billion.
Anti-climate sentiment in the US is likely to get much worse if Donald Trump wins a second term in this November’s presidential election, according to Alden Meyer, a senior associate at E3G working on US and international climate policy and politics.
“[Trump] will be a domestic and international climate wrecking ball, there is no doubt about that,” Meyer said at the same conference, which took place during Climate Action Week in London.
“He will pull out of [the] Paris [Agreement] on day one, not day 180,” he added. “The question will also be, ‘Will he pull out of the UN Framework Convention on Climate Change?’ Or even worse, will he decide to stay in and try to build a coalition of the unwilling with other malefactors and to destroy it from the inside?”
Meyer predicted that Trump would try to “gut” climate finance, questioning whether there would be scope to work with other Republicans to prevent that.
In contrast, a second Biden term would be much more positive for climate and would likely result in an updated climate goal for 2035 “somewhere in the 60s”, Meyer said – referring to the target percentage drop in emissions. Currently, the US aims to reduce emissions by 50-52% by 2030.
But whoever wins the November poll, the US will likely remain a global laggard as long as the Republicans have control of either of the chambers of US Congress. Currently, they control the House of Representatives.
“The president has no power when it comes to money in our system,” Meyer said. “The saying is, ‘The president proposes, the congress disposes.’ Our constitution gives the congress total control over finance in the US.”
Changing that so that the US steps up its contribution to global climate finance mitigation and adaptation initiatives, would require changing the thinking of the Republican Party. “And that is a task of years – not months,” Meyer said.
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