Holding the Line: Sustainable Asset Management amidst ESG Scepticism

Sustainable asset management is a key force shaping the relationship between investing and environmental and social consciousness. Global challenges are transforming how investors and asset managers perceive value and risk, with profitability and growth no longer separate from sustainable corporate practices but fundamental to them. Nevertheless, recent developments appear to threaten the progress of sustainable asset management. BlackRock, Vanguard, and other global giants in asset management, once staunch proponents of ESG strategies, have begun to pull back support for ESG-led investments, resulting from a mixture of political pressures, concerns over ‘overreaching’ shareholder proposals, and increasing scrutiny about the financial viability of ESG. Ultimately, however, though sustainable asset management faces a range of challenges, including standardising definitions, data acquisition hurdles, and ‘greenwashing’ accusations, it is far more than a mere trend; it is a proven value-creating investment approach poised to be a key cornerstone of future asset management.  

Though the integration of ethical, environmental, and social principles into investment decisions is not a novel idea, the significant expansion in the number of ESG funds and sustainable investments, and their total value over the past decade underscores an important transformation within the broader asset management industry. According to a Bloomberg study, sustainable investing is consistently reaching new heights, with $37.8tn in assets under management in 2022 and projected to reach $53tn by 2025. Data from Mayer Brown suggests that this increase is being driven by asset managers increasingly leveraging sustainability for both risk management and value creation, utilising the strategies to develop a comprehensive lens capable of identifying and mitigating against non-financial risks. Such an approach receives support from the fact that over the last five years, companies which reduced emissions faster than their peers also outperformed them, seeing a 3% improvement in annual growth over companies in the worst quintile of emissions management. Alongside improvements in cost-efficiency and long-term stability, sustainable asset management can utilise an asset’s environmental and social impacts to better gauge its investment potential. This consideration helps in shielding it from external and internal shocks, including changing consumer values, carbon taxes, stranded assets, and governance-related fines. This last factor is particularly significant, with McKinsey estimating that one-third of corporate profits are currently at risk of state intervention.

Despite these opportunities, sustainable asset management and ESG more broadly have increasingly come under fire, precipitated by developments such as the collapse of Silicon Valley Bank and concerns amongst U.S. policymakers, primarily those aligned on the right-wing, that sustainable asset management neglects financial responsibility and due diligence. For critics, an undue focus on sustainability criteria may compromise the principal goal of maximising investor returns, potentially leading to economic instability and endangering the financial health of institutions that adopt this approach. While BlackRock has become one of the most prominent voices in support of investing in accordance with ESG principles, its CEO, Larry Fink, recently stated that he will cease use of the term ‘ESG’ when it comes to investment decisions. Daan Van Acker, programme manager at FinanceMap, notes that US asset management backtracking has coincided with the anti-ESG rhetoric emanating from several US state legislatures. The significant decline in support for shareholder proposals on environmental and social issues on at BlackRock is a clear indication that this pressure is leading to more than just semantic changes, falling from 47% in 2021 to just 7% in the first half of 2023. Finding that many shareholder proposals were overreaching, lacking economic merit, or simply redundant, it appears that while sustainable asset management is not being abandoned, its future growth may face considerable challenges. 

Alongside political developments and concerns about financial viability, sustainable asset management also faces challenges when it comes to the regulatory landscape and data integrity. Regulatory evolutions within the EU are acting as a double-edged sword, on the one hand attempting to combat ‘greenwashing’ whilst further complicating the processes of sustainable asset management. Proposed new EU rules to be introduced have been criticised as ‘unworkable’, requiring the greenest funds to consist of 100% sustainable investments, which virtually all funds would fail to qualify for. A study by FT demonstrates that action should be implemented to challenge those funds with low percentages of sustainable investments, such as those which hold between 0-10% of total sustainable holdings. Instead of redirecting capital towards sustainable activities whilst combating ‘greenwashing’, the process may become excessively complex, requiring additional financial and human resources that may reduce the appetite for future investments in this area. Closely linked to the issue of ‘greenwashing’ is that of data integrity, with 65% of respondents to Mayor Brown’s survey of East Asian asset managers stating difficulties in accessing ESG that are both relevant and authentic. Thus, credible data is crucial to mitigate the risk of asset managers exaggerating green efforts. 

Despite the challenges observed, the outlook for sustainable asset management remains promising. The fundamental societal and financial imperatives that have driven sustainable investing persist despite ESG scepticism. While industry giants such as BlackRock and Vanguard have moderated their earlier enthusiasm for ESG-led investment, less drastic changes were seen in their rival State Street, which saw a smaller reduction in support for shareholder resolutions from 49% in 2021 to 32% in the first half of 2023. It appears that ESG-related investment has evolved from a fleeting trend marked by inflated expectations and scepticism towards a more stable reality that requires sustained focus to remain relevant. There remain substantial challenges ahead for sustainable asset management, notably, the imperative to ascertain financial performance while concurrently complying with regulatory changes and avoiding greenwashing. 

However, with the advent and integration of artificial intelligence tools designed to refine the ESG analysis process, there is room for optimism that these obstacles can be overcome. The industry, with its tailored products ranging from ESG-centric funds to impact bonds, has the capacity to cater for a wide base of retail and institutional investors and their varied risk appetites and sustainability objectives. Meanwhile, sustainable asset management is making inroads into new territories. Despite Asian equity portfolios currently lagging behind in achieving their net-zero objectives, progress is underway in this region as well. With Hong Kong and Singapore pioneering new sustainability-related regulations, whilst innovative frameworks such as the ASEAN Taxonomy for Sustainable Finance have been introduced, the region is experiencing accelerating momentum towards improved sustainability. With 95% of asset managers yet to align their strategies with the IEA Net Emissions by 2050 Scenario and the collective equity value held in fossil fuel production standing at 2.8 times higher than green investments, the increasing adoption of ESG considerations into investment strategies offers a promising horizon whilst also highlighting the immense gap that must still be closed. Considering these insights, it is apparent that the journey ahead is marked by both challenges and potential; and yet, with continued innovation and commitment, the industry remains poised to redefine the essence of value and growth within asset management.