Recently, Larry Fink, CEO of Blackrock, announced that he and his organization would no longer be using the term ESG (Environmental, Social, Governance), an investment strategy geared towards ‘responsible investing,’ which Blackrock helped to pioneer and promote. ESG offers investors a way to ‘responsibly invest (at least on paper) in companies who are environmentally and socially good corporate citizens. Many critics have accused the policy of following a “woke” agenda.
One problem with ESG is the criteria used to determine if a company is ESG investable. Without universally defined standards, ratings of companies are often vague. A study published in the Review of Finance found that “ESG rating divergence is not merely a matter of varying definitions but a fundamental disagreement about the underlying data.”
In a New York Post article, Mr. Fink said he was abandoning the ESG terminology because it had become “politicized by both the left and the right.” However, the real reason appears to be its failure to appeal to investors.
Looking to capitalize on cultural trends, ESG was a marketing department’s dream come true. It offered a new product category designed to appeal to the social consciousness of younger investors whose incomes have reached a point where they can invest in their future. ESG was also attractive to older generations, moved by concern for the well-being of future generations. It provided a vehicle to feel like they were doing something that would make a difference for years to come.
However, most people invest for the long-term growth of their hard-earned income. They count on returns on investment for future needs, especially in retirement. Investing in products with flawed research and performance data exposes investors to untold risk. Regardless of their political leanings, all investors are in the market for the same reason: to win. A New York Stern School of Business study found that 33% of investor-focused studies showed positive outcomes for ESG-themed investments, and 67% showed neutral, mixed, or negative results. Results like these are hardly enticing.
While the politicization of ESG is partially to blame for its derailment, the failure of ESG to sustain its position in the financial marketplace is not only because liberals and conservatives disagreed about the strategy’s premise. It is also because Blackrock and similar companies have driven off the rails of what their customers want. They have driven down a path of virtue-signaled marketing intended to draw investors on emotional impulse over actual performance.
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In the case of Blackrock’s decision to stop using the term ESG, it is not surprising that Mr. Fink chose to blame the public rather than acknowledge that ESG investing does not produce the results that investors demand. Marketing-driven organizations never circle back and admit defeat. They press the accelerator to the floor and try to put distance between their failure and their future.
In addition to poor performance, one of the biggest reasons that movements like ESG meet resistance is the punitive nature of such programs. Whether implied or real, inorganic environmental and social movements often bear ‘cancel consequences’ for those individuals or organizations who do not play along. In the case of ESG, the lack of guidelines exposes the movement to political-ideological posturing without consideration for actual results.
In short, people are weary of being told what to believe and coerced into social movements. The decline of ESG is just one recent failure rooted in a rejection of false ideologies projected in flashy, feel-good marketing. The results are in, and these ideals are a losing investment.
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