Markets Are Speaking on ESG Investing, Let Them

For years, advocates of progressive investment practices have insisted that investments based on so-called environmental, social, and governance (ESG) factors can return the same profits levels as those based on traditional pecuniary considerations. They have even undertaken efforts to mandate investing based such criteria – both directly and indirectly. Supplanting objective measures such as revenue, profit, and loss with subjective, amorphous standards has always been a bogus proposition, a fact capital markets are increasingly confirming.

In recent months, major investment managers have pivoted – rhetorically, at least – from ESG. They are contending with market forces and increasingly radical demands from ESG proponents. Starry-eyed pro-ESG dogma cannot contend with economic realities. As a result, ESG funds are losing the battle to traditional funds. Asset managers are beginning to realize this.

BlackRock CEO Larry Fink’s 2024 letter to investors evidences this realization.  “It’s our clients’ money. If they want to invest in hydrocarbons, we give them every opportunity to do it – the same way we invest roughly $138 billion in energy transition strategies.” He follows, “No other force can lift more people from poverty or improve quality of life quite like capitalism.”

This is the answer.

The shift is stark. In recent years, Fink praised the ESG investing movement. BlackRock even championed a burdensome SEC rulemaking imposing onerous reporting requirements in a backdoor attempt to regulate carbon emissions. Such a rule could cost businesses billions and shareholders trillions in lost stock value..

However, Fink’s recent letter, published yesterday morning, has no allusions to trendy progressive investment buzzwords or government mandates. This clear shift in tone, precipitated by market pushback, could signify the beginnings of a corporate return to good, old-fashioned profit-driven management.

Fink’s letter confirms BlackRock’s commitment to “energy pragmatism.” The nomenclatural shift from “ESG” to “energy pragmatism” suggests BlackRock has heard, and wishes to seem responsive to, market signals and the other geopolitical realities of premature, abrupt technology shifts.

Indeed, BlackRock has modified its investment strategies. “BlackRock…is no longer pushing for changes in corporate behavior, talking about hard-to-quantify social issues or actively promoting ESG investing criteria,” The Wall Street Journal reported earlier this month. “Instead, it is directing billions of client dollars toward infrastructure projects that will help speed the transition from fossil fuels.” This strategy shift warrants optimism, albeit cautious.

Above all, Fink acknowledges his investors ought to be able to invest where they like. Instead of progressive activists mandating ESG investing or conservative state governments trying to ban it, markets should be able to read the room and respond, as BlackRock seems to have done.

Those skeptical of ESG should take heart. Today, markets are doing what markets do best: providing feedback through profits and price signals, indicating what investments serve consumer needs, and which do not. Government actors on both sides of the political spectrum ought to step back and let markets continue to do so.