The Power Of The Purse: When Money Outweighs Politics

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The Power Of The Purse: When Money Outweighs Politics

Sustainable investing – which aims to integrate ESG considerations with investment criteria – is at the centre of a deep political divide in the United States. This divide came to the fore in March, when Joe Biden rejected a congressional measure to block a Labor Department rule that would allow pension fund managers to consider ESG factors in investment decisions.

Wall Street’s largest investment firms are finding themselves in the firing line. In December 2022, the Texas Senate Committee questioned executives from BlackRock and State Street on whether their ESG policies are hindering state pension investments and asked to clarify their participation in rulemaking on ESG standards. BlackRock was dealt another blow that month when Florida’s chief financial officer announced his department would be withdrawing $2 billion worth of assets managed by BlackRock, citing its ESG stance.

The investment community is undergoing a gradual shift from viewing sustainability as simply a means of doing good to re-evaluating how they make money. BlackRock has maintained a consistent approach to climate-related engagements, despite anti-ESG sentiments. In its Engagement Priorities, published in March 2023, BlackRock emphasizes its commitment to understanding how businesses manage risks and capitalize on opportunities, continuing to encourage firms to follow the Task Force on Climate-related Financial Disclosures (TCFD) reporting guidance.

BlackRock is not alone in taking a tougher stance on ESG matters. Since January 2022, State Street has required firms to provide TCFD-aligned disclosures. In February 2023 Norway’s Sovereign Wealth Fund, which manages nearly $1.2 trillion (14 trillion NOK), warned the 9,200 firms in which it holds a stake that it will vote against the re-election of business directors if they do not adequately address ESG concerns.

What should CEOs take from these developments? No matter how political an issue is, money talks. Firms cannot afford to overlook the requirements cascading down from their shareholders and the risks associated with non-compliance.

Organizations must prioritize transparency in their sustainability strategies and ensure they have the necessary information systems needed to satisfy shareholder requirements for investor-grade data. Corporate leaders must operationalize sustainability by making it the realm of all job functions and leveraging existing skills to streamline data collection and break down information silos. Given the complexities of complying with climate-related disclosures, firms will need to explore the feasibility of creating a climate advisory board, designed to advise on regulatory developments and oversee climate-related risks and opportunities.

For more information on how firms can address shareholder and regulatory ESG demands, check out Verdantix Strategic Focus: Organizations And The Rise Of ESG and Verdantix Market Insight: Digital Functionalities To Manage ESG Risks.

Luke Gowland

Industry Analyst

Luke is an Industry Analyst in the Verdantix ESG & Sustainability practice. His current research agenda focusses on emerging technologies and trends in the ESG software space. Prior to joining Verdantix, Luke worked as an analyst at GlobalData where he gained experience in ESG and key business technologies. Luke holds an MSc in Sustainability and Management from the University of Bath.