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The increasing political hostility toward considering ESG investing issues has translated into a loss of enthusiasm among many US asset managers when compared to their peers in other developed economies.

This was the conclusion from analytics firm Morningstar’s latest report Voting on ESG: Ever-Widening Differences, which said that while US companies were retreating from ESG, European asset managers have maintained a high level of support for ESG-related shareholder proposals.

“As a result, sustainability-focused investors are facing a more complicated landscape, and possibly greater difficulty, when it comes to aligning their investments with their own values,” it said. “In Europe, where expectations of support for ESG resolutions are higher, and several of the US firms have large market share, these concerns are growing in intensity.”

"Sustainability-focused investors are increasingly questioning whether their manager’s voting policy is well-aligned with their own environmental and social objectives,” said Lindsey Stewart, Director of Investment Stewardship Research, Morningstar, on the report’s findings. “In Europe, where expectations of proxy-voting support are higher, and several of the US firms have large market share, those questions are being asked with greater intensity.

The report gives few surprising reasons for the retreat of ESG from the US financial services industry, where it has become a topic resulting in political football. Those predicting it would become embraced in the US are now few and far between.

Even in neighbouring Canada, ESG has become much more normalised and embedded.

Ongoing issues around embedding ESG

In August last year, Morningstar revealed a qualitative assessment of 108 global asset managers’ dedication to and success in incorporating ESG factors into their investment processes to deliver sustainability outcomes that showed vast geographical differences in developed markets.

The study rated asset managers by four levels: Leader, Advanced, Basic, and Low.

Of the 31 entrants in the ‘Low’ group, 12 were US-based, representing roughly a quarter of the total US companies covered – which was similar to the four out of 22 for the UK. Nearly half of Australia’s 27 entries were rated ‘Low”.

Not a single European firm was rated ‘Low’, whereas one Singaporean firm, Eastspring Investments, was the remaining company.

Another Morningstar study last year on attitudes of asset owners revealed that according to the results of a survey of asset owners from around the globe, asset owners identified a range of growing ESG implementation challenges in 2023 – ranking market data, the market environment, and regulation as the most significant.

“Tellingly, participants did not rate any ESG challenges as having decreased,” said the report. 

The survey correlated with another recent Morningstar report focused on asset managers, which showed that English-speaking countries (UK, US, and Australia) filled the lower end of the ESG investing commitment spectrum. 

In December, a Thomson Reuters Institute white paper, “ESG: Navigating past the noise”, said many companies that have sought to combat climate change, increase the diversity in their workforce, or bring greater rigor to the oversight of issues that fall under the ESG umbrella have “had a tough year”.

“ESG has become a polarising, politicised term — seized upon by politicians who paint such policies as a threat to the voters and companies they represent,” said Thomson Reuters statement. “The resulting backlash has been most visible in the US where anti-woke rhetoric and policies from far-right Republican states have all but made the ESG label a bit too hot for many companies to handle, at least overtly.”

US-Europe support gap grows to worrying extent

A Gallup poll from 2023 showed that when asked whether "retirement fund managers should only take financial factors into account when making investment decisions or also consider ESG factors, the American public leant toward the former (48% vs. 41%, respectively)". Gallup said that "stock owners’ views on this are nearly identical to the national averages", but also noted that awareness of ESG was still not very high among the general public.

The report showed that the different levels of support for ESG goals have grown significantly and showed no sign of slowing down and reversing depending on which side of the Atlantic asset managers were based on. “Independent shareholder support for key ESG resolutions at US companies fell below 50% for the first time in over three years in 2023,” said the report. “[The] analysis of asset manager voting records reveals that European peers did not mimic the falling support trends among US managers. Average support for key ESG resolutions in 2023 for the 20 US managers is 50%, well behind the 99% average for the 15 European managers we evaluated.”

The report analysed 227 ESG resolutions in the last three proxy years: 53 in 2023, 102 in 2022, and 67 in 2021. “Adjusted support for these resolutions fell below 50% for the first time in over three years in 2023, amid manager concerns that US shareholder resolutions were becoming inappropriately prescriptive.”

The report specified that ten out of 20 US equity fund managers are now “low supporters” for key ESG resolutions in 2023, compared with just five based on average support for the last three years. “The trend in key resolution support was negative for 12 of the 20 US managers in 2023, compared with only six in 2022,” it said and named American Century, BlackRock, Capital Group, Goldman Sachs, and Janus Henderson as showing the strongest negative trends.

Just one of the US companies showed growing support for ESG resolution from 2021 to 2023 – Charles Schwab, which went from 65% support to 80%.

Companies such as BlackRock have changed their views on ESG massively in the past few years with investment and operations seeing volatile paths.

The US managers’ voting record stands in stark contrast to that of European managers, Morningstar said. “We examined the voting records of 15 of the largest European managers of equity funds, finding that their support for key ESG resolutions was consistently very high, averaging 98% over the last three proxy years.”

Only one European company showed a fall in 2023 trends – Pictet, which went from 100% support to 91%. All 15 European companies kept their average support from 2021 - 2023 above 90%. By comparison, Vanguard had the lowest US average at 9%.

This all means that the split will continue and muddy the waters for fund operators trying to balance internal and client needs, especially if they operate in certain geographies.

 

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