ESG experienced a painful 2022 – 01/04/2023, 16:45
In Europe, the debate mainly revolved around the definition of sustainable finance in the second half of 2022. The aforementioned SFDR (Sustainable Financial Disclosure Rule), the initial uncertainty of the contours of the concept of excessive freedom for asset managers. (Photo credit: Adobe Stock – )
– ESG had a clear future. But 2022 will be a rough awakening for an approach that thinks it’s ready to change the world. ESG has been particularly scrutinized by the market over the past twelve months, with asset accumulation and many investors converting to this approach. And due to the lack of uniformity and precise definition, numerous debates have occurred in various areas such as war, non-financial rating or even the politicization of the financial sector. To the point of questioning the relevance of ESG. A brief overview of a year full of controversy.
The Orpea case highlights the weaknesses of ESG ratings
The questioning of ESG started rapidly in 2022 with the Orpea case. In January, the publication of Les Fossoyeurs rocked the French nursing home operator on the stock market. Journalist Victor Castanet accused him of treating his patients badly.
However, Orpea was among the best-rated in its universe in terms of ESG prior to its launch. In the financial world, this has led many voices to question the relevance of non-financial ratings. As a result, the European Commission’s Directorate-General for Financial Stability (DG Fisma) launched a public consultation on the ESG rating market in Europe. The president of Esma, Verena Ross, also announced that the European regulator wants to supervise non-financial agencies.
In an interview with Newsmanagers, Florian Berg, a researcher associated with the MIT Sloan School of Management, explained the various flaws in the current supplemental financial rating, such as inconsistencies in data and methodologies or the time gap between record changes. review by agency and by manager.
The war in Ukraine raises certain questions
The following month, the criteria for ESG funds came under renewed criticism following Russia’s invasion of Ukraine. When you’re an ESG fund, should you or can you invest in defensive stocks? Euan Munro, chief executive of Newton IM, defended this, arguing that national security is part of the “common good”.
On the sanctions side and the divestment of companies exposed to Russia, ESG investors have been slow to make a decision. They had to arbitrate between protecting international law and human rights and protecting the Russian population from the consequences of the withdrawal of some companies, especially those in the food sector.
The problem of exposure to these dictatorial regimes goes beyond the simple case of Russia. In March, two NGOs (Inclusive Development International and Altsean-Burma) accused 344 ESG funds of investing in 33 companies that provide arms, technology and communications to the ruling Burmese military junta. Total debt disclosed: $13.4 billion.
ESG is becoming a political issue in the US
Geopolitics is not the only area of ESG concern. Domestic politics are perhaps more likely to sow the seeds of discord. Indeed, while asset management is accused of not being green enough in Europe, it is quite the opposite in the US. Republicans there have launched a war against ESG investing, which they describe as “cancer”, “fraud” or even “waking up capitalism”. Some Republican states have decided to simply cut ties with managers who take an ESG approach. This mainly applies to pension funds from Florida, Louisiana, Utah, Arkansas or even Kentucky, which have more than $3 billion in assets that have terminated the mandate entrusted to BlackRock. Conversely, the head of New York City’s public pension funds felt BlackRock wasn’t doing enough for the climate!
The topic of ESG even became a campaign argument during the midterm elections. Republicans have promised to listen to the heads of the main American management companies (BlackRock, State Street and Vanguard), as well as the Democratic chairman of the American regulator SEC, Gary Gensler, about ESG investments. However, they lost the House majority by five seats.
Faced with these political attacks, the two American giants of passive management Vanguard and BlackRock decided to follow different lines of defense. First, the Net Zero Asset Managers Initiative played it safe by leaving the manager alliance. Second, he began a balancing act by reminding Republicans that he is still heavily invested in American energy, but that consideration of climate risks is necessary for certain customers in terms of future returns. This approach did not sit well with the lead investors of Bluebell Capital Partners, who asked Larry Fink to resign. “The contradictions and apparent hypocrisy of BlackRock’s actions…politicized the ESG discussion,” they wrote in a letter to BlackRock’s CEO and founder.
The Great Collapse of Article 9 Funds
In Europe, the debate mainly revolved around the definition of sustainable finance in the second half of 2022. The aforementioned SFDR (Sustainable Financial Disclosure Rule), the initial uncertainty of the contours of the concept of excessive freedom for asset managers.
The recent clarification of what constitutes an Article 9 fund by the European regulator Esma has led to a massive reclassification of funds into Article 8 and even Article 6. This mainly affected passive funds that track indices that comply with the Paris Agreement (PAB – Paris). -aligned Benchmark) and CTB (Climate Transition Benchmark). Major management houses such as BlackRock, Amundi, Pictet AM, BNP Paribas AM and DWS were the first to withdraw. Mid-sized players such as La Française AM and Carmignac have followed suit.
This problem has prompted the European Commission to start an evaluation of this regulation in 2023.
In the rest of the world, Anglo-Saxon regulators have decided to tighten ESG and sustainability rules. As such, the United Kingdom has launched a consultation on future sustainability standards for funds. The Financial Conduct Authority, for its part, will now check that management companies comply with its ESG principles. In the US, the SEC intends to tighten reporting rules for ESG funds. The American regulator also amended two rules, including the naming rule, to require funds carrying the ESG term to invest at least 80% of their assets under management’s offering in a name. This American rule impressed Esma, who began consulting on the use of ESG in fund names. Finally, Indian and Chinese regulators have also launched projects to strengthen the transparency of green financial products.
Sanctions are still limited in terms of greenwashing
Competitive pressure among asset managers to meet growing demand for sustainable financial products has prompted some players to take too many marketing risks. This has prompted government authorities to take measures to protect consumers. In Germany, police raided the offices of Deutsche Bank and DWS as part of their investigations into ESG fund fraud, leading to the resignation of Asoka Woehrmann, who led the German bank’s asset management businesses, and the CEO of DWS. The management subsidiary was accused by a former employee in 2021 of lying about the extent of its green investments. The house has since been the subject of a complaint by the consumer protection agency of the state of Baden-Württemberg for misleading advertising about “supposedly sustainable investments”.
In the US, the SEC imposed financial sanctions against leading players. BNY Mellon Investment Advisors, a subsidiary of BNY Mellon, has been fined $1.5 million for making misleading claims about its funds using ESG criteria in stock selection. Goldman Sachs AM paid him $4 million to end an investigation into his management of two funds and mandates that met ESG criteria.