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Wall Street Hates Saying ‘ESG’ But Is Hardwiring It Into Finance

By Alastair Marsh and Lisa Pham

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What You Need to Know

  • The finance industry is now grappling with a second year of attacks on ESG by key Republicans and state attorneys general.
  • After a pandemic-fanned boom, the acronym collided with an energy crisis, leading to huge losses for funds shunning fossil fuels.

Bankers, money managers and other financial market participants are starting to loathe the label “ESG” — but they’re also sticking with the strategy, according to a Bloomberg survey.

About two-thirds of respondents in a survey of roughly 300 Bloomberg terminal users said the anti-ESG movement that started in the U.S. last year will force firms to stop using those three letters in conversations with clients.

However, they’ll continue to incorporate environmental, social and governance metrics in their business, they also said.

ESG backlash is having an effect, but... |

When it comes to “the three-letter acronym ‘ESG’ — people don’t want to talk about it as much because of the news flow from the U.S.,” said Alex Bibani, a senior portfolio manager at Allianz Global Investors in London. “But from an investment perspective and what we do internally, it has never been more important.”

The finance industry is now grappling with a second year of attacks on ESG by key members of the Republican Party, including threats of litigation from state attorneys general, as well as outright bans on the strategy in some U.S. states.

As recently as May, Florida Governor and presidential hopeful Ron DeSantis signed a sweeping anti-ESG bill he says targets the “woke” bias of the finance industry. And in June, BlackRock Inc. CEO Larry Fink said he doesn’t want to use the term “ESG” anymore, after it was “weaponized.”

While such attacks may end up shaping the nomenclature, they’re unlikely to change the finance industry’s approach in tackling some key components of ESG such as climate change, according to the Bloomberg survey.

Only 18% of respondents who identified themselves as using ESG in their work said the backlash against the label was stopping them from incorporating climate factors in their decision making. Instead, they pointed to climate data challenges as a bigger hurdle.

For ESG investors, 2023 has been filled with “big swings,” Coco Zhang, ESG researcher at ING Groep NV, and Padhraic Garvey, ING’s regional head of research for the Americas, said in a note. “But global sustainable finance remains in rude health,” they said. That includes “exceptional growth” in green issuance, which is among reasons to “get more upbeat” about the future.

Hurdles to incorporating climate data |

The term ESG has only existed for about two decades after being created through a United Nations-led initiative. The goal was to come up with a framework that would persuade profit oriented financial firms to pay attention to the environment, to societal risks and issues of governance.

The construct was supposed to drive home the point that ignoring such risks and opportunities would ultimately lead to losses.

But since then, ESG has had a bumpy ride. After a pandemic-fanned boom, the acronym collided with an energy crisis, leading to huge losses among ESG funds that had shunned fossil fuels. At the same time, questions have been raised around the cottage industry of consultancies and data providers all feeding off ESG, much of which is still unregulated.

Sustainable investing purists have also voiced dismay at the way in which the ESG label is often used, warning that its application has become so broad as to be rendered largely meaningless. That’s as some estimates have suggested that financial market participants were collectively sitting on about $40 trillion in ESG assets.

In the European Union, regulators and legislators have moved much faster than their peers in other jurisdictions, carving out frameworks that are intended to reinvent capitalism. In an interview last month, the EU’s commissioner for financial markets and services, Mairead McGuinness, said firms that don’t take ESG seriously will face a bleak future in Europe.

“Profit is important but we’re now saying it’s not the only thing that matters,” she said.

That view is deeply at odds with responses in the Bloomberg survey, however. Some 85% of respondents who identified themselves as being engaged with ESG said financial performance is the most important factor to consider when investing.

Only 39% said the same of ESG, which was the lowest reading in the survey.

The survey also showed that an overwhelming majority of finance industry professionals don’t want the government to interfere in how private investors allocate their money.

Of financial market participants who use ESG in their daily work, 89% of respondents said governments should stay away from such decisions, while 98% of respondents who don’t use ESG said the same.

Key factors in investment and operational decision making |

It’s a sentiment that’s playing out on Wall Street. As recently as Aug. 10, the Securities Industry and Financial Markets Association, whose members include BlackRock, State Street Corp. and Vanguard Group Inc., filed a lawsuit against Missouri Secretary of State Jay Aschcroft (a Republican), after he placed ESG investing limits on firms.

The Bloomberg survey was based on responses from 304 terminal users, of which 69% said they use ESG in their jobs. Some 62% of respondents were based in North America, while 26% were based in Europe, the Middle East and Africa. The rest were spread across Asia Pacific and Latin America.

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