As February turns to March, the finance world is waiting with bated breath for one of its most dubious annual traditions: The Larry Fink Annual Letter to CEOs. Since 2012, when the BlackRock chief executive wrote his first letter, the occasion has come to symbolise the growing threat both to shareholder capitalism and American democracy posed by investment houses’ crusade to force the principles of ESG, or “environmental, social, and governance” investing, down the throats of companies, investors, and the public.
ESG first entered the investment and banking mainstream as a survival strategy. In 2009, BlackRock had acquired Barclay’s Global Investors Ltd, making it the largest investment firm in the world with almost $3 trillion in assets under management (AUM), a sum larger than the total revenue of the US federal treasury. Politically speaking, BlackRock’s emergence as an investment superpower could hardly have come at a worse time. Amid the wreckage of the 2008 Financial Crisis and then the ululations of the “Occupy Wall Street” movement, public suspicion of big banks and corporations was at an all-time high. Finance, in particular, became a morality play: financial institutions were the greedy villains, while policymakers played the heroic civic advocates reining them in. For BlackRock, the chances of continuing to grow freely in such a hostile policy climate seemed remote.
But BlackRock’s leaders had an epiphany — one that would repeat itself in the C-suites of several of its competitors in the early 2010s. What if big investment houses could rebrand themselves as so unimpeachably virtuous and civic-minded that their virtue outshone even their regulators themselves? Such a strategy would be game-changing. Not only would it afford investment houses a mile-wide road to limitless growth; it could even, if played judiciously, accord the companies themselves quasi-governmental power.
The ESG principles underpinning that strategy had already been written. The 2004 United Nations report “Who Cares Wins,” which introduced the principles of ESG to a worldwide audience, suggested that investors would make higher long-term profits if they put more emphasis on environmental and social progress. The small print was that the task of defining these impossibly broad categories (“environmental” or “social”) would be left to international institutions. Per those institutions’ priorities, “environmental” would mostly focus on implementing CO2-reduction goals, while “social” would mean anything related to the UN’s stated social goals on issues such as gender parity, racial justice, and poverty reduction. In other words, from the very beginning, the goal of ESG was to harmonise the priorities of political elites with those of business leaders. This approach was nothing new in Europe, where Klaus Schwab and his World Economic Forum (WEF) had long blurred the lines between business and government. But in the US, where the WEF ethos had failed to take root and the shareholder remained king, it was a radical departure.
When the UN invited global financial institutions to sign onto the Principles for Responsible Investment (PRI) in 2007, the total global assets managed by ESG-minded investing vehicles was around $10 trillion. By 2020, a mere 13 years later, that has grown to more than $30 trillion worldwide and more than $17 trillion in the US. New private equity firms and investment outfits devoted purely to ESG — such as Al Gore’s Generation Investment — were springing up every year, and most large US investment firms began offering ESG-mandated mutual funds, leading Bloomberg in 2021 to project $53 trillion invested in ESG by 2025.
As the ESG agenda took hold, the individual investor increasingly found himself shunted aside. Admittedly, the roots of this shift lay in the early Eighties, when federal proxy voting rules were changed to allow fund managers such as BlackRock to vote on behalf of their clients. The idea was a good one at the time, in that it recognised that few individual investors have the time to attend shareholder meetings or the wherewithal to make their views known to company leadership. But it handed vast power to investment companies — admittedly under the understanding that they would vote on behalf of their clients for one purpose only: the maximisation of profits and shareholder returns. It was, however, only a matter of time before this power was exploited.