BlackRock CEO Larry Fink has become the latest critic of ESG investing, deeming it a "weaponized" term. ESG — which stands for Environmental, Social, Governance — strategies encourage investing in companies prioritizing their climate impact, sociopolitical messaging, and how they treat their own employees. A Yahoo Finance Live roundtable discussion highlights the political opponents to ESG movements, how oil producers are responding to pushes for clean energy, and the concept of greenwashing.
Video Transcript
RACHELLE AKUFFO: ESG has been making the headlines. But what does it actually mean? Well, the concept is simple. Make investment decisions based on corporate policies.
So let's break it down for you. E stands for environmental. A company's initiatives to fight climate change and become more green. As is with social, how the company treats its employees and the community that it serves. And finally, G, governance. The company's leadership and decision making.
Now, the movement has become a big part of the investment landscape attracting trillions of dollars in investment. But the doubters say, it's become little more than virtue signaling. So can conscientious capitalism live on? Well, it's time for "Yahoo Finance's" debate. Over to Julie Hyman, Brad Smith, Rick Newman, and Jacob Blikre. Hey, guys.
JULIE HYMAN: Hey, thanks, Rachelle. Appreciate it. So ESG, the reason that it has come up even more so recently is that there has been a battle, if you will, between investment managers, and for that matter, some pension plans that want ESG to be part of their investment decisions. And then some states or other figures who do not.
And Rick, you wrote about this week that Larry Fink of BlackRock, of course, basically, said, I'm not saying ESG anymore.
RICK NEWMAN: And that's important because Larry Fink has been one of the biggest proponents of ESG investing. And BlackRock is huge. So if BlackRock is actually doing this, many other investment managers have to follow. Specifically, think about Ron DeSantis. He has declared what he calls this war on woke capitalism. That is pushback against ESG investing and other things that might be related to ESG investing.
And the state of Florida has actually said some of their teacher funds or things like that, they actually do not want going to any investing firm that practices ESG investing. So that's the blowback. So what is Larry Fink talking about? I don't think we know. Is he just going to rebrand it? Is it going to be the same philosophy, look for these virtuous companies, as you might call them? Or is he actually going to change his focus?
I don't think we know that yet. But that's what's at stake here.
BRAD SMITH: Well, what he said in the past is that climate risk is investment risk, is portfolio risk. And he had correlated the two. So if we separate the E side from the S side of ESG, that's where you get into the more politicized annexation of woke, which has been co-opted and perhaps so muddled to the point where it is distant and deviant from the actual meaning of where companies were more values based, where they were trying to be more conscious about the consumers that they were serving and growing out more global, or even just more diverse client base as well, which investors should look at and say, hey, potentially, that means growth for the business, potentially, that means expansion of the market.
But instead, that's been pushed to a different direction.
JULIE HYMAN: And you're looking at the money that we've seen in these things.
JARED BLIKRE: Exactly. And to your point here, the rise of ESG-- I think 2019 was probably a breakout year. That's when we saw a lot of ESG outperformance as well. And so these investments, which had been considered fringe suddenly, they're outperforming the S&P 500 in 2019, even 2020, I believe. But then they took a back seat.
And I'm going to show the YFi Interactive here. I have an ESG funds heatmap. So everything's equal weighted here because we're not dealing with market cap. But in the upper left, GSPC, that is the S&P 500. This is year-to-date. It's up over 15%. Very impressive. You'll notice that all of these ESG funds, these are underperforming, even the top one just underperforming by a little bit. This covers the USA. This is iShares. This is an ESG ETF for them.
Now, you take a look over the last year, you're going to see even more underperformance. You got some red there. And then two years, it's looking really bad. Because we go back two years ago, that was when a lot of stocks were topping. One of these down. XLK down 33%.
And then three years, still the S&P 500 comes out on top. So it's definitely been outperforming. And that has been diminishing some of the arguments pro-ESG. Now, I have a couple of notes here. I want to show on the YFi Interactive as well. This is from Sanford Bernstein. I'm going to highlight some text here on the YFi Interactive. The term ESG was first coined in 2005. Fast forward today, ESG investing is at a crossroads. And I highlight some of the political uncertainty that leads to it.
And here's the key line. The term may change, but the concept of ESG has been around for over 200 years and has been reinvented multiple times. Now, I want to show another source here. This is from Goldman. Energy firm's focus has shifted from ESG to energy security. And we can see in this chart going back to 2010, the cyan line here, which has just risen metaphorically here, and that comes with the timing of the conflict from Russia and Ukraine, that has shot up. And it has overtaken the concerns, the interest in ESG.
So there is a switching of paths here, where the rubber meets the road. And people had to confront the reality that, yes, energy security is important. Now, can these two concepts be merged? Can we go back and maybe have a best of all worlds here? I would like to think so. But it's an evolving concept, I guess, is my point here.
RICK NEWMAN: I think the evolution of the concept argues against the concept completely.
BRAD SMITH: Really?
RICK NEWMAN: So I've followed the energy markets a lot during the last year. And they are a target of so-called ESG investing. So defund fossil fuels and so on. Interesting concept. I certainly don't argue with the fact that we need to decrease the amount of carbon in the atmosphere and deal with global warming. But at what cost? Are we willing to have shortages of fossil fuels that we need right now? Actually, no.
So gasoline prices hit $5, in part, because energy firms don't want to invest in drilling anymore because their industry is under attack. And they see what's happening. We're shifting over to renewables. And there even government policies now support that. So they don't want to invest in new capacity. They want to give money back to shareholders. And we end up with skyrocketing energy prices. And that undermines public support for the whole thing.
JULIE HYMAN: There is a new crop of investors, though. Folks like Engine Number One capital, who are pushing internally not to defund energy, but to push B shareholders of these companies and internally push for changes, push for increasing investment in renewables.
RICK NEWMAN: And they have one or two board seats at Exxon now. And they're supported by the California Teachers Pension Fund. So that's we're it's coming from.
JULIE HYMAN: So there are different ways that people have been pushing for this.
RICK NEWMAN: This highlights a problem. So some traditional energy firms are doing more for renewables than others. How do you fit that into your ESG portfolio? Do you say, BP is in the ESG portfolio, but ExxonMobil is out? What's your threshold for Green energy of investment?
JULIE HYMAN: I think it depends on the portfolio. Just to take a step back here, one of the other older terms for this is stakeholder capitalism. It's that when you're investing in a company, you shouldn't just be considering the bottom line and the return, to your point, and that heat map that we get that that's not the only thing that you should consider. You should consider whether the company is a good corporate citizen, for lack of a better term.
Is it helping to promote environmental, social, and governance goals? And I think if that's how somebody wants to invest, that's a valid goal, if that's how somebody wants to invest. Recognizing that you're just the bottom line. It's not the only thing that you're assessing.
BRAD SMITH: And the other part of this too is where for individual investors are they looking at companies that are not trying to make such a drastic shift, but are starting out with that as a north star and saying, we're going to bring the rest of the industry with us or, at least, putting pressure on the rest of the industry to make a change or to recognize that there's a clear clientele there. Take Tesla, for instance. A company that made somehow electric vehicles sexy by coming in at the top end of the luxury model there. And then saying, all right, now, we're going to make this more approachable for everyone else.
They've never moved off of their environmental vision or that goal. But they have brought a lot of other traditional combustion engine manufacturers along with them into that space because they are now realizing that they're going to miss out on that wave--
RICK NEWMAN: Also non-union.
BRAD SMITH: Also non-union.
RICK NEWMAN: So how do you square that? So I would like to introduce one other factor. So you said 2019, the peak for ESG.
JARED BLIKRE: Also a peak in the growth stocks critically because those were considered ESG stocks, like Apple, Meta. Those were considered ESG just because they were not Exxon. So that gets back to the shifting definition of the very term.
RICK NEWMAN: OK. So Donald Trump was President in 2019. The US was doing basically nothing on to address global warming and climate change. Joe Biden comes in. We now have the most aggressive us effort to address global warming and climate change ever with the Inflation Reduction Act, all these incentives for Green energy.
These goals are important. I think we probably all agree all these goals of ESG investing are important. The question is, should you go after them through investing? And there are other ways to go after these goals. Activists do it through boycotting companies or calling attention to practices they don't like. We now have massive government intervention in the market with literally hundreds of billions of dollars of incentives for Green energy.
That is going to be way more effective than ESG investing portfolios.
JARED BLIKRE: Money [INAUDIBLE].
RICK NEWMAN: Absolutely.
JULIE HYMAN: That's a really good point. And that's a good point that the inflection here now a little bit away from ESG comes, at a time, then the government stepping in and doing the job.
RICK NEWMAN: There was a perception before the Biden administration. That was accurate that the government's not doing anything here. So let's--
JULIE HYMAN: All companies have to do it.
RICK NEWMAN: --see if we can muster some private sector incentives to do this.
JULIE HYMAN: There's one element of this that we haven't talked so much about. And that's the idea of so-called greenwashing or whatever term you want to apply to it, which is that when we had the upsurge in interest in ESG and companies wanted to be thought of as ESG, they would put this language in their statements and on their conference calls. Were they really adhering to this?
You bring up big cap tech, which also are incredible consumers of energy. You think about data centers and the energy that they use. That is a very energy inefficient business. So there's also that idea, and this goes to your point as well, Rick, that it's really difficult to say, this company is adhering to ESG. Or it's doing in a one area, but not doing it another area. And how do you weigh all that?
RICK NEWMAN: Companies change.
JULIE HYMAN: Sure.
BRAD SMITH: And then they had loopholes that they could move around with cap and trade, previously, about 10 years ago.
RICK NEWMAN: Or now, it's buying pollution credits.
JARED BLIKRE: That's financial engineering, by the way. Jack Welch would have given anything for carbon credits. Let me tell you.
JULIE HYMAN: Jack Welch, that paragon of ESG.
JARED BLIKRE: Yeah.
BRAD SMITH: At the end of the day, the amount of companies that are sensing where they can satisfy investors or satisfy the narrative that they've put forward to client bases by saying, well, here's a loophole that we can just buy into for the amount of offsets that we can purchase, instead of actually changing the operation that's perhaps going to upset investors. Because then, it will upset what our margins actually look like--
RICK NEWMAN: Greenwashing is definitely a thing. It happens. As a reporter, I've tried to look into this. It's hard. I can't imagine how any ordinary person who has a day job and just looks at his or her portfolio, and tries to pick stocks here and there evenings and weekends, could ever figure this out. So, yes, you can rely on investment managers to do that work for you.
I don't really have a lot of trust that even the investment managers can keep up with it. There just better ways to go after these goals. And to go back to what I've been following a lot, which is the war on woke capitalism, we have a massive culture clash in the United States these days that is just going to continue. And CEOs are constantly having to figure out. This is mostly social issues, which is one third of ESG. CEOs are constantly having to figure out where to take a stand on social issues, where not to take a stand.
Of course, we saw this blow up with Bud Light trying to support the trans community and then getting pushback for that. The struggle is part of the process. The struggle, these battles between activists saying, the companies should do this and the companies saying, we really don't want to get involved, this is normal. This is actually how cultures evolve. And it's part of the process. So it's messy.
JARED BLIKRE: Do you see it as cyclical, though? Because it seems like activism has been on the rise over the last few years. And maybe, it's just a secular thing that changes with the generations. But it seems like all that activism has been increasing recently over the years.
RICK NEWMAN: It certainly has been politicized for a lot of reasons we all know about. Social media, cable news, the Trump effect. Everything gets politicized. There are always controversies that companies get sucked in into unaware. And they never thought they had to have a plan for it. It used to be giving-- Delta gave discounts to NRA members. And they canceled that. And then they had a big fight with gun owners.
There's always going to be an issue. And consumers just want their brands, if the extent they care about them, to be authentic.
BRAD SMITH: Right.
RICK NEWMAN: They want you to just-- it evolve with the culture. And maybe when you have to step up, step up. And take the shot. A lot of CEOs don't want to take a stance on these issues clearly.
JULIE HYMAN: Bud Light is a very good example of that.
BRAD SMITH: And they're a good example because they wavered on it.
JULIE HYMAN: Yes.
BRAD SMITH: And for companies that have shown that they're willing to be performative in Bud Light's case, and I use that specifically because it was pure performance because they did not stand by what they were putting out in--
RICK NEWMAN: That was a mistake.
BRAD SMITH: And it was a mistake. It's proven to be a mistake.
RICK NEWMAN: That should have been part of the plan all along. This is going to be controversial. We need to anticipate it. What's our response going to be, if we get attacked for this?
BRAD SMITH: Nike, one of the early companies that did that many years ago. Colin Kaepernick and the campaign, which went viral standing for something, even if it meant sacrificing anything. You think about the companies that have had to actually stand by it and have done it. Well, you mentioned Delta. Their CEO Ed Bastian has been very vocal about-- even going into an election year, they were not going to sacrifice their values and their business in order for profit.
They are going to make sure that their purpose is also driving profit at the end of the day as well.
RICK NEWMAN: Of course, the other example here is Disney, which is having this ongoing legal battle with Ron DeSantis in Florida. They also made the mistake, which is they were wishy-washy at the beginning. But then they changed CEOs.
JULIE HYMAN: Well, that part of what caused Chapek's job. Is that he was wishy-washy in the beginning.
RICK NEWMAN: Now, they are fighting with both fists. And they are just saying, we're going to take this on completely. So they got to where they need to be.
JULIE HYMAN: And I think just to put a pin in this, it's very interesting the conversation we're having, which went from investor, what investors are prioritizing to what consumers are prioritizing in the case of these very consumer facing brands. And then, of course, it comes back around to investors again. Because if it costs them, as it did in the case of Bud Light, or seemingly in the case of Disney, they seem to have come out on top of this, then what is it going to do for their bottom line?
And that's what we'd like to focus on. All right. That does it for us.
