Within the space of just four months last year, the world’s largest asset manager BlackRock lost two big mandates to invest money on behalf of European pension schemes. The decision was largely the result of the fund group’s approach to climate action.
Dutch company PME Group, which oversees about €59bn of retirement savings, ended its relationship with the New York-based asset manager over worries that it was less focused than some of its peers on assessing climate change in its investment selection process.
The removal of the mandate came just weeks after PFZW pulled about €14bn from BlackRock, as the Dutch pension fund changed its investment strategy to focus more on sustainability. BlackRock still manages some money-market funds for the scheme.
The decisions underscore the importance of environmental, social and governance factors, known as ESG, for large European investors when putting money to work.
However in the US, some pension funds have been clamouring for the opposite. Some schemes have pushed for investments in fossil fuel companies, in the view that they deliver superior returns, and have even pulled money from asset managers for considering ESG factors when investing.
The diverging attitudes underscore a widening divide between the US and Europe over investment approaches to ESG. Experts argue the retreat from the strategy in the US was exacerbated by Donald Trump’s return to the White House as president last year, which resulted in a series of executive orders to crack down on ESG.
Asset managers also face the challenge of navigating different regulations globally and a patchwork of reporting requirements. With contrasting political views and a complicated global regulatory framework, do asset managers hit the pause button on their ESG policies or do they push ahead?
“It’s certainly the case that the global picture has become more complicated, with contradictions and differences across regions having increased,” says Andy Howard, Schroders’ global head of sustainable investment.
“While some firms treat sustainability as a disclosure or compliance exercise, to us it’s an extension of active management and our commitment to clients, as well as an additional source of information for the investment decisions we make.”
Despite the pressure on US-based asset managers as they attempt to straddle the divide, BlackRock says it is still focused on ESG internationally.
“More than 80 per cent of our largest clients in both Europe and Apac [Asia Pacific] have climate investing objectives, and we are committed to helping all clients achieve their investment goals,” says BlackRock.
“Over the past three years, clients have entrusted us with approximately $185bn in net-new business in sustainable investing strategies, including approximately $60bn last year.”
Fund managers tend to use ESG to select stocks in companies and other assets that meet certain standards, to satisfy investors who believe that such factors can help improve longer term returns and avoid certain risks, such as corporate fines for polluting. Asset managers evaluate companies using ESG factors to not only select stocks for investment, but also to determine which harmful sectors or companies to exclude.
“The phrase ESG has become extremely polarised,” says Alex Edmans, professor of finance at London Business School. “The ESG word is problematic as it leads to an allergic reaction; otherwise smart people are cancelling something because of the ESG label.
“So do fund managers care about ESG? They absolutely do, they might not all call it that.” Edmans argued in a recent academic paper that, rather than viewing ESG as a separate label, it should simply be widely adopted in investment practices as “critical to long-term value”.
Even though asset managers in Europe continue to use ESG policies, the process has arguably taken “a back seat” in the past few years, due to “intensifying geopolitical pressures,” argues Neil Connor, head of asset management at KPMG UK.
“For the large part, the heavy lifting has already been done so while client demand may fluctuate, it’s now business as usual rather than a standalone programme. Many of the major ESG regulatory frameworks introduced over the past decade are now embedded across the business, from investment processes through to disclosures.
“But there’s clearly a transatlantic divide. In the US, political pressure has pushed ESG further down the priority list — a trend that predates the current administration but was accelerated by the 2024 election. This has made firms more cautious when it comes to the visibility of their ESG policies, particularly those with a large US footprint.”
Carlota Esguevillas, head of sustainable investment at London-based fund group EdenTree, says that political rhetoric shifts over time, while the underlying opportunities and risks of ESG investing will remain relevant over the longer term.
“While some companies, particularly in the US, have become less willing to put their heads above the parapet and discuss their sustainability efforts, in the large part their actions haven’t changed.
“Taking climate change as an example, we believe it remains a financially material risk, and despite the surrounding rhetoric, corporate drive to tackle climate change remains generally strong.”
Another key hurdle is the differing regulatory frameworks. In the EU, the corporate sustainability reporting directive mandates that thousands of companies must report their ESG data, while the sustainable finance disclosure regulation requires financial companies to disclose how they incorporate ESG in their investment process, making it easier for asset managers’ clients to compare funds.
Similarly in the UK, many large businesses are mandated to disclose their ESG data. The Financial Conduct Authority created sustainability disclosure requirements and investment labels for funds.
“While the global regulatory picture is fragmented, investors still need robust analysis of governance, strategy and sustainability-related risks, and rigorous and patient stewardship to back that up,” says Esguevillas at EdenTree.
Some investors in Europe have also turned cooler on ESG funds recently. Last year, European investors pulled a net $62bn from ESG funds, although so far this year, they have been more positive, investing a net $50bn to the end of February, according to data from Morningstar Direct.
Experts believe ESG could become more popular in the US once the end of Trump’s administration nears, with his current term set to end in early 2029.
“Issues like climate risk and transition finance aren’t going away, so while ESG may move up and down the priority list, it won’t disappear completely,” says Connor at KPMG.
