Wall Street starts calling time on ESG labels after backlash

At Institutional Investor, keeper of Wall Street’s version of the Oscars for financial analysts, the winner in one category this year is - nobody.

The red carpet is being formally rolled up for the three letters, ESG. The 57-year-old II has dropped the label, short for environmental, social and governance, from its annual analyst rankings.

In its place is “sustainability,” a synonym many banks and money managers are using instead, amid the increasingly politicized debate over climate change and corporate diversity in the US.This is how it is these days for ESG in American finance. The label, which emerged from obscurity only to be hyped by Wall Street and then attacked by Republican politicians, is being scrubbed from some investment products and job titles.

“Banks aren’t all in like they were during the boom days,” said Michael Karp, who runs recruitment firm Options Group in New York.

Financial firms have been navigating a fraught path in the US for much of the past two years. They’re much less vocal about topics like climate change to avoid the ire of oil-rich red states, but not completely silent so as to not alienate clients in blue states and cities, as well as those in Europe, where ESG - both the term and the investment business - remains a potent force.

At stake are more than a few letters: The historic hurricane that battered the Caribbean and then Texas, and recent wildfires in California show the gravity of an overheating planet. And that’s stoking demand for niche but fast-growing corners of ESG investing, including climate-transition funds and debt instruments such as catastrophe bonds, where issuance is at a record high.

In addition, global investment in the energy transition rose 17% last year to a record $1.8 trillion and the numbers continue to grow, according to researchers at BloombergNEF. The US posted “strong growth” in 2023, spending $303 billion, BNEF said.

While some US firms, including Neuberger Berman, are sticking with ESG, others say the label is diminished. Jefferies Financial Group Inc. has replaced ESG in analysts’ job titles with the words “sustainability and transition.” Wellington Management Co. and Lazard Asset Management have cut jobs. Bank of America Corp. has reorganized its ESG research team and merged the group’s activities with clean energy.

Representatives for the firms declined to comment or didn’t respond to messages seeking comment.

The narrative around ESG has certainly changed. Bank chiefs, who were talking up “net zero” emissions goals just a few ago, continue to do business with fossil-fuel companies. State Street Global Advisors and other investment giants have abandoned groups set up to fight global warming. Investor support for environmental and social shareholder proposals has declined, and mentions of climate change, as well as diversity, equity and inclusion, or DEI, are now much less common on company conference calls.

Other headwinds for ESG include a seminal climate rule from the US Securities and Exchange Commission that’s being challenged in the courts and the Federal Reserve, which has thwarted efforts to make environmental risks a focus of global financial rules. Another big worry is the possibility of a second Trump administration that would be even more hostile to climate initiatives and environmental regulation than the first.

Perhaps most importantly, wind and solar, a big part of the green-energy pitch, has simply been a bad investment lately. The S&P Global Clean Energy Index has plummeted more than 50% from its peak in early 2021, even as the S&P 500 ascended to record highs.

Small wonder, then, that US funds with ESG goals are falling out of favor. Despite gains in the broader stock market, the sector’s assets have fallen to roughly $335 billion from a peak closer to $365 billion at the end of 2021, according to researchers at Morningstar Inc.

And investors are pulling money at a faster pace. In the first three months of this year, they withdrew a record $8.8 billion from these funds, marking the sixth consecutive quarter of outflows, Morningstar reported. The industry malaise also forced hedge fund manager Jeff Ubben to shutter his sustainable-investment fund late last year, saying the strategy hasn’t been rewarded in financial markets.

At the same time, the once-promising business of ESG bonds has gone from hot to not for Wall Street underwriters. About $38 billion of ESG-linked corporate bonds were issued in the US during the first six months of the year, down from about $70 billion in the first half of 2021 when the industry took off.

Institutional Investor, for its part, is simply following the lead of the industry it chronicles, according to David Enticknap, who runs II Research. “Whilst there may be a perceived backlash against the term ESG, we understand that most sell-side firms have retained some analysts in the field,’’ Enticknap said in an email. Changing the category to “sustainability” made sense, he said.Ever since the label was conjured up by United Nations staffers two decades ago, it’s often confused people inside and outside of the financial industry because it covers a diffuse set of overlapping topics. That didn’t stop Wall Street from using ESG to sell everything from mom-and-pop investment funds to complex financial products.

The industry has been “overpowered by those who simply have their short-term financial interest in focus,” said John Streur, a champion of socially responsible investing since the 1990s who stepped down in March as chief executive officer of Calvert Research and Management.

“We’re still a niche, let’s face it,” said Streur, who’s currently working on an ESG data project.

After ESG topics such as worker strikes drove down shares of US automakers and wildfires in Europe hurt the tourist industry last year, investors can ill afford to totally shun the label.

“If we don’t have ESG, company valuations will be bumpy and there could be events that drive companies out of business,’’ said Alison Taylor, who teaches sustainability at New York University.

But some US firms are staying the course on ESG topics. Jim Coulter, co-founder of private equity giant TPG Inc., featured in a video posted on the firm’s website titled “Capital and the Climate Revolution.” JPMorgan Chase & Co. and Citigroup Inc. rank among the top global underwriters of green bonds this year, while Bank of America, Neuberger Berman and Wells Fargo & Co. sponsored conferences in New York and Chicago as recently as last month that focused on ESG topics.

And while BlackRock CEO Larry Fink - a target of GOP officials for promoting ESG - has stopped mentioning the label, George Walker, who runs Neuberger Berman, isn’t shying away. The second cousin of former US President George W. Bush said his New York-based firm was “at a loss” in understanding how investments can be managed responsibly without regarding financially important ESG risks and opportunities.

The term ESG has been used imprecisely in the industry, creating a perception that “those who embraced it were beholden to a social or even political agenda,” Walker wrote in Neuberger’s annual report. The only agenda the firm has is to meet its client’s objectives, and that “always requires us to try to be aware” of all financially material risk exposures, he said.

Walker also pointed to a New Hampshire bill that was introduced earlier this year - and quickly rejected - that sought to criminalize the use of ESG factors.

The incident, he said, “speaks to the moment of hyper-polarization and politicization of these issues.”

--With assistance from Caleb Mutua.