Politics is fraught with pitfalls for those not adept at navigating the landscape. It's a lesson that major Wall Street firms are currently learning.
Last week Vanguard, an investment adviser with more than $7 trillion in global assets, announced that it was reversing course and abandoning its commitment to the Net Zero Asset Managers initiative that it joined in 2021.
Signatories of the NZAM initiative pledged to engage with companies, policymakers and other investment industry participants about transitioning to an economy with net-zero greenhouse gas emissions by 2050 or sooner.
"Such industry initiatives can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms," Vanguard said last week.
"We have decided to withdraw from NZAM so that we can provide the clarity our investors... and to make clear that Vanguard speaks independently on matters of importance to our investors."
The company says that it still remains committed to combatting the risks that climate change can pose to the long-term returns of its investors.
So if the mission is still the same, the question must be asked: what has changed?
The short answer is politics.
ESG and the Political Landscape
Last week Arizona State Treasurer Kimberly Yee issued a statement that said the Sunshine State would continue to divest more than $543 million from BlackRock (BLK) money market funds, with plans to reduce its direct exposure to the firm by 97% in 2022.
Yee laid the reason for the divestment at the feet of CEO Larry Fink, whose annual letters to investors in recent years "began dictating to businesses in the United States to follow his personal political beliefs. In short, BlackRock moved from a traditional asset manager to a political action committee."
BlackRock also signed up to the NAZM initiative in 2021, committing to have 77% of its assets under management aligned with net-zero carbon emissions by 2050 or sooner.
Arizona isn't the first, or biggest, politically right-leaning state to pull funds out of BlackRock, the world's largest asset manager with $8 trillion in assets.
Officials in West Virginia, Texas, Louisiana, Missouri and Florida (which said its pulling $2 billion in assets from BlackRock) have all said that they've had enough with the asset manager's environmental, social and corporate governance (ESG) policies.
"There can be no doubt that Republican states like Texas, Florida, Louisiana and South Carolina have ESG investing in their sights," Nigel Green of deVere Group, a financial advisory firm, said.
"Against this background, it can be reasonably assumed that heightening political pressure is responsible for a growing number of financial firms stepping away from their own commitments and from offering ESG investing to their clients.”
At issue for many of the states pushing back is that their economies rely on fossil fuels, and now those states are pooling their more than $600 billion in financial investments to send the BlackRock's and Vanguard's of the financial world a message.
Riley Moore, West Virginia's treasurer, is leading a 15-state coalition that aims to "take concrete steps toward selecting financial institutions that are not engaged in harmful fossil fuel industry boycotts for the states’ future financial services contracts."
"Any financial institution that has adopted policies aimed at diminishing a large portion of our states’ revenue has a major conflict of interest against holding, maintaining, or managing those funds," the group said.
Shifting Business Attitudes
Members of the Business Roundtable -- an influential group that features the heads of some of the world's biggest companies including Apple, General Motors, Walmart, and BlackRock -- announced a major shift in August 2019.
In 1997, the Business Roundtable declared that the purpose of a corporation was to "maximize shareholder value" by maximizing profits. By 2019, their view had shifted.
The group's new "Statement on the Purpose of a Corporation" stated that corporations should invest in their employees, deal ethically with suppliers, support communities in which they work.
Generating long-term value for shareholders was notably the last bullet point in the statement that was signed by the CEOs of 181 companies in the group.
So it shouldn't come a surprise to industry watchers that many high profile companies have gone "woke" -- a phrase that has been transformed to deride those on the left concerned with social issues -- and have changed their priorities to ESG issues.
But change comes at a cost, and many of the world's biggest companies should expect to continue to see pushback from the right against their initiatives.
Vanguard won't be the last firm to lose its mettle in the face of political opposition as the pushback against ESG becomes more intense.
