Four US financial giants retreat on climate action amid political pressure

Political and regulatory pressure seems to have taken its toll. Four U.S. financial juggernauts (JPMorgan, BlackRock, State Street and Pimco), which hold trillions of dollars in assets, have withdrawn or reduced their involvement in Climate Action 100+, the biggest coalition of investors and large companies vying to curb emissions and combat global warming.

“Opinions on sustainability or ESG practices, particularly those related to climate issues, have become political issues, which can heighten reputational risks,” State Street said in its annual report, submitted this week to the U.S. Securities and Exchange Commission (SEC). “They are bowing to climate change deniers,” says one Democratic official.

Sustainable investment criteria, or ESG — which stands for ‘environmental, social and governance’ — are at the heart of an ideological and political tussle in the United States. Republicans have ramped up pressure against these criteria on several fronts. The latest proposal, in the New Hampshire state legislature, was to criminalize them in some cases. The initiative has been rejected, but some states are vetoing management firms that apply them and there is also pressure from Congress.

The chairman of the House Judiciary Committee, Jim Jordan, and two other Republicans sent letters to State Street, BlackRock and Vanguard executives, requesting explanations of their ESG practices. In the letters, the congressmen suggested that the companies were violating U.S. antitrust law by coordinating and entering into collusive agreements to “decarbonize” assets being managed and reduce emissions to net zero. Membership in groups such as Climate Action 100+ was particularly in focus. Some 700 investors belong to this organization, but these four giants accounted for $14 trillion, approximately 20% of the total.

The withdrawal of the financial leaders does not imply that the companies are abandoning the fight against climate change, but rather that they are disassociating their actions from the guidelines laid down by the group. Last year, Climate Action 100+ established new, stricter guidelines aimed at making investors more active in their efforts to reduce emissions. The entities claim that by withdrawing they intend to maintain their autonomy and independence of decision making in relation to the companies.

Political division

The initial announcements were applauded by Congressman Jordan: “Today’s decisions by JPMorgan and State Street are big wins for freedom and the American economy, and we hope more financial institutions follow suit in abandoning collusive ESG actions,” he tweeted.

In contrast, New York City Comptroller Brad Lander, a Democrat, disapproved: “Climate risk is financial risk. Today BlackRock, JPMorgan, and State Street are choosing to ignore both,” he said in a statement. “By caving in to the demands of right-wing politicians funded by the fossil fuel industry and backing out of their commitment to Climate Action 100+, these enormous financial institutions are failing in their fiduciary duty and putting trillions of dollars of their clients’ assets at risk,” he added, before concluding: “Put plainly: they are caving to climate deniers.”

Lander was particularly critical of BlackRock, whose chief Larry Fink claimed three years ago that climate risk is a financial risk and was at the forefront of climate investment activism. The firm has not completely withdrawn from the Climate Action 100+ group, but has left its place to its international division.

BlackRock had previously issued the first warning that things were about to change in its 2022 annual report. “ESG and sustainability have been the subject of increased regulatory focus across jurisdictions,” it warned. “Some US states and/or state officials have adopted or proposed legislation or otherwise have taken official positions restricting or prohibiting state government entities from doing certain business with entities identified by the state as “boycotting” or “discriminating” against particular industries or considering ESG factors in their investment processes and proxy voting. Other states and localities may adopt similar legislation or other ESG-related laws and positions,” it adds.

Another problem for large investment firms is the differences in perception and regulation in the United States and Europe. State Street readily acknowledges this in its annual report: “The general expectations of our stakeholders, including regulators and clients, outside the United States, especially in Europe, with regard to sustainability or ESG issues may be significantly different from expectations in the United States. Because we perform our asset management activities globally, conflicting global expectations in the U.S. and outside the U.S. complicate our ability to mitigate risks,” it explains.

ESG criteria have changed in the risk management criteria of listed companies. Before, the risk was not to adopt them. Now, the risk is to apply them, or both at once. “Activists have taken actions intended to change or influence JPMorgan Chase’s business practices with regard to ESG issues, including public protests at JPMorgan Chase’s headquarters and other properties, and the submission of specific ESG-related proposals for a vote by JPMorgan Chase shareholders,” the bank says in its annual report.

“Fiduciary, anti-competitive, voting power, governance and other issues posed by ESG investment strategies remain the subject of legislative and regulatory debate around the world, especially at the federal and state levels in the United States,” says State Street, which stresses the regulatory and political scrutiny to which the entity is subjected. “Some U.S. officials have suggested that investment practices related to sustainability or ESG may result in violations of the law — including antitrust laws — and breaches of fiduciary duty,” it admits.

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