Evolving ESG Landscape Leads to Changes at Mutual Funds and Rating Agencies

Market forces including ongoing changes to ESG regulations and frameworks, continuing anti-ESG pushback in the U.S., and growing competition among ESG service providers, are leading to changes to the way leading asset managers and rating agencies are incorporating ESG into their businesses.

Our Top Stories in this issue include reports from ESG Today about a decision by BlackRock, the largest asset manager in the world, to change the way it engages with companies and votes regarding climate issues, along with news that Fidelity, one of the largest mutual fund companies, has revised its sustainable investing framework. In addition, Responsible Investing reports on the move by Moody’s ratings service to exit its ESG ratings business and instead offer data and ratings from its competitor MSCI.

Our newsletter has reported on the anti-ESG movement in the U.S. and in particular the attacks by Republican politicians on asset managers such as BlackRock that had been vocal about ESG and climate change over the past several years. BlackRock’s CEO, Larry Fink, has moved away from public use of the term ESG, even though the firm continues to grow its ESG-designated assets, managing more than $800 billion according to Morningstar.

In another sign that BlackRock is de-emphasizing references to ESG, BlackRock recently unveiled its new “Climate and Decarbonization Stewardship Guidelines,” which set out separate engagement and voting policies for investors focused on the low carbon transition. According to ESG Today, the new policies will be applied to funds for clients who explicitly direct the firm to invest their assets with decarbonization investment objectives. The new policies will prioritize voting and engagement activities on sectors and companies described by BlackRock as “critical to the transition to a low-carbon economy.” For all other clients, BlackRock will apply its benchmark voting and engagement policy, which would still include “consideration of climate-related risks and opportunities in a company’s business model, where material to the company’s ability to deliver long-term financial returns.”

Unlike the changes at BlackRock, the announcement from Fidelity about a revised sustainability investing framework was driven by evolving regulatory requirements in the EU and UK for asset managers who market and manage sustainability-focused firms. In particular, ESG Today cited the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the European Securities and Markets Authority’s new guidelines, which include an 80% threshold as a minimum proportion for funds to use the term “sustainable.” The UK Financial Conduct Authority (FCA) also recently launched Sustainability Disclosure Requirements aimed at helping investors assess sustainability-focused funds and avoid greenwashing risks.

The exit of Moody’s from the ESG ratings business appears to be driven by competitive pressures, according to Responsible Investor. Moody’s acquired ESG-rater Vigeo Eiris in 2019 and later rebranded the company as Moody’s ESG Solutions. In 2023, Moody’s ESG and climate revenues grew by less than 10% to $207 million, while MSCI reported growth of more than 30% to $472 million, according to data from Opimas. In its report, Responsible Investor cites consolidation concerns from investors and other stakeholders regarding higher prices and the loss of a rater that historically was more receptive to feedback from stakeholders as opposed to firms like MSCI that offer ratings but no understanding of ESG risks.

The G&A team continues to monitor impacts on all stakeholders from the ever-changing regulatory, political, and business factors that influence corporate ESG and sustainability reporting. We are available to help you interpret these changes and guide your sustainability journey.

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.