BlackRock's evolution on ESG is a rational response to market forces

Adobe Stock

A casual observer of trends could be forgiven for perceiving recent announcements from BlackRock about its turn away from a focus on  environmental, social and governance, or ESG, investing as a sudden response to new political winds from Washington. No doubt these winds are encouraging reconsideration of any number of public stances across all industries, but BlackRock's evolution away from ESG investing is not an overnight conversion. Rather, the recent departures from more public climate activism and DEI practices reflect market trends that started well before the current administration took office. Nonetheless, it's a welcome shift, and policymakers should take note. 

For the past decade, BlackRock, the world's largest asset manager, has evolved from being promoted as the future of investing to a buzzword for anti-market activism. For a time, investment firms competed to be the brightest shade of "green" to eco-investors. Proxy advisors were willing participants and supported activist pressure campaigns to adopt more and more ESG policies. To be sure, there are market opportunities for investors in these spaces, and as ever, asset managers have a responsibility to investors to find them under every rock.

With time, enthusiasm for ESG has waned apace with performance, and no amount of activism can serve as a substitute for solid market returns. 

The numbers tell the story. In 2024, U.S. sustainable funds lost $19.6 billion, following a $13.3 billion withdrawal in 2023, according to Morningstar. While investors weren't rejecting ESG outright — there remains over $340 billion invested in sustainable funds — they were nevertheless rightsizing investment positions. In simple terms, many of these funds underperformed and investors noticed.

BlackRock's shift is a response to this trend. Last year, the company only supported 4.1% of ESG-related shareholder proposals, a significant drop from previous years. This wasn't because alternative energy is no longer worthy of investment — it was because many of these proposals were unrealistic, costly or didn't benefit investors. The role of an investment firm is to generate returns, not to act as an activist organization. Investors should value that reaffirmation from asset managers.

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To be clear, ESG investing still has a place in the market. Some investors want funds that consider environmental and social factors, and that's fine. The free market allocates capital more efficiently than any system yet devised. As long as those investments are worthy on their own terms, capital should follow. 

The problem arises when activism, rather than market forces, pushes companies into ESG investing. This is where proxy advisory firms like Institutional Shareholder Services, or ISS, and Glass Lewis have been particularly active in recent years. These two companies control 91% of the proxy advisory market, meaning they have an outsize influence on corporate decision-making. They have pushed ESG policies as an inherent good, rather than a potential market to be parsed for worthy investments.

A recent report highlights how BlackRock and other investors are responding. They are rejecting extreme proposals and reconsidering their relationships with these proxy advisors. This is an important shift because it allows investment decisions to be based on market fundamentals rather than activism. The financial system works best when it reflects the interests of actual investors, not the ideological goals of a small group of influencers.

None of this means ESG is useless. Like any investment strategy, ESG should succeed or fail based on its financial performance. If an ESG fund makes strong returns, investors will support it. If it doesn't, they'll take their money elsewhere. That's how markets are supposed to function.

BlackRock's decision to step back from activism is a win for investors and a sign that markets are working as they always have and should. Capital should be allocated based on financial success, not political pressure. The company isn't abandoning responsibility — it's refocusing on its primary duty: making smart financial decisions for its investors.