BlackRock’s Backlash Signals a Reckoning for ESG ETFs

Will attacks by prominent conservative politicians mean reconsidering ESG as a whole?

Reviewed by: Lisa Barr
Edited by: Sean Allocca

For whatever good ESG investing seeks to bring to the world, lately it's been getting a bad name.  

BlackRock Inc. CEO Larry Fink, who famously titled his 2019 annual letter "Purpose and Profit," announced his firm will cease to use the environmental, social and governance acronym after prominent conservative politicians in the U.S. have slammed the strategy.  

Florida Gov. Ron DeSantis has called it "woke capitalism" and yanked $2 billion in investments from the world’s largest asset manager, while former Vice President Mike Pence has decried what he calls “the radical ESG agenda.” 

If others follow Fink's lead, the question becomes one of terminology or philosophy. Avoiding the polarizing cultural term “woke” may be as easy as rebranding. But financial advisors could depart the sector as a whole and put the brakes on what has been until now an explosive phenomenon.  

“The term ESG has been politicized by individuals who usually hold anti-climate change and/or anti-DEI positions,” said Dr. Jeanette Maree Fielding, CEO of Confident Strategy Group, referring to diversity, equity and inclusion efforts.  

But successful businesses, she added, “have long considered these external factors in their strategy before the term ESG became popular, as they saw them as vital to the impact and value of their business.” 

ESG Investing 

Regardless of the political or cultural climate, ESG investing is in a season of movement into more "thematic funds" that focus on a particular, more narrowly defined aspect of environmental, social or governance matters.  

"Many investors are currently replacing the broader ESG grouping with more specific types of material risks such as human capital, natural capital, biodiversity and climate change," said Kilian Moote, managing director, Georgeson. Witness DWS, which recently swapped its USCA ESG fund into what it now calls a “Climate Action Equity ETF” (using the same USCA ticker).  

As of the beginning of March, there were 273 thematic ETFs, with five launches and one closure in February, statistics compiled by Global X show. That number of thematic ETFs represents roughly double the number that existed at the outset of 2021.  

If nothing else, the growing hue and cry creates an opportunity for an ESG reality check. To begin with, ESG remains notoriously difficult to measure in any consistent fashion. While it’s one thing to quantify a carbon footprint, for example, no single, global standard for ESG reporting as a whole exists. Financial Executives International reports that 85% of companies use not one but multiple ESG reporting frameworks. And some (e.g., MSCI and Institutional Shareholder Services) have proven more reliable than others.  

But in the end, the strength of ETF investment based on ESG will mainly boil down to returns. In the financial world—where financial advisors concentrate on delivering those strong returns and not grandstanding for voters—the longer-term prospects for ESG funds appear strong, no matter what you label them.  

Institutional ESG Investing

ESG-focused institutional investment is projected to soar 84% to $33.9 trillion by 2026, making up 21.5% of assets under management, according to a PwC report. Meanwhile, eight out of 10 U.S. investors plan to increase their allocations to ESG products over the next two years, the report predicted.  

“With ESG funds largely outperforming year to date, now is a great time to take a closer look under the hood of all ESG funds,” said Andrew Poreda, senior research analyst on Sage Advisory’s ESG & Impact Investing team.  

“The index construction for passive strategies is critical for investors to understand,” he explained. There are many nuances that might have strongly impacted past performances and will also affect future ones. And there are a myriad of different choices. Just look at the U.S. equity strategies offered by BlackRock alone.”  

Lou Carlozo is editor and publisher of Talking Biz News, a business journalism website. He is also the host and creator of the Bankadelic podcast, and a Pulitzer Prize finalist and Polk Award winner as a team reporter. Carlozo is also a former Chicago Tribune columnist, editor and staff writer.