Investment firms are pulling back from ESG projects: A turning point in the fight for sustainability and social justice

In recent years, pressure from investors has led to visible changes in large U.S. companies. Commitments to combating inequality and supporting diverse workforces have become standard. Approximately 80 percent of these companies publish their CO2 emissions and actively strive to reduce packaging and other waste. Major asset managers like BlackRock and Vanguard have openly discussed the importance of environmental, social, and governance (ESG) factors, often reinforcing their rhetoric by voting for related shareholder proposals. In 2021, the world's two largest asset managers supported over 46 percent of environmental and social proposals, seeing this as in the best interest of investors. However, four years later, the picture has drastically changed. In the 2024 proxy season, BlackRock supported only 4 percent of E&S proposals, while Vanguard voted against all of them. The number of accepted resolutions dropped from 64 in 2022 to just 13. Left-wing activists are concerned about this shift. Some accuse the major U.S. investment firms of "greenwashing," claiming they were never genuinely interested in climate change and inequality. Others argue that the asset managers have capitulated to Republican attacks on so-called "woke capitalism." There is, however, a less grim explanation. The ESG movement has already achieved many of the low-hanging fruits, and activists now face more challenging tasks. Initially, many investors saw no conflict between economic success and social responsibility. Stocks of clean energy companies rose rapidly, and measures to reduce emissions and avoid waste were supported by both investors and environmentalists. On the social side, improving the hiring and retention of diverse employees was not only a response to societal issues highlighted by the 2020 protests against police violence but also enhanced employee retention and morale. However, profit motives and progressive idealism have since diverged. Rapid decarbonization is proving complex and costly. Concerns over energy security have caused fossil fuel stocks to soar, and consumer boycotts of retailers like Target and Bud Light's maker over their stances on LGBTQ+ issues have demonstrated that social statements can carry financial costs. U.S. funds explicitly committed to ESG have now recorded net outflows for seven consecutive quarters, with total assets under management standing at $336 billion—significantly below the peak in 2021. This puts asset managers like Vanguard and BlackRock in a dilemma. The vast majority of the stocks they control are in index funds without an ESG focus, and U.S. law requires fund managers to act in the financial interest of their clients. This means they face legal consequences if they prioritize public welfare over profit. However, sustainability activists believe that the window to prevent irreparable climate damage is closing. They continue to push shareholder resolutions to enforce more action on social and environmental issues and aim to give a red card to asset managers who continue investing in fossil fuels. So far, the pressure has not yielded the desired results. Shareholder support for E&S proposals has halved to 16 percent since 2021, and many of the largest U.S. fund managers have reduced or ended their commitments to groups pushing companies to cut CO2 emissions. Asset managers are now seeking a way out of this deadlock. BlackRock plans to split its shareholder votes. Climate-focused funds will impose stricter standards on companies regarding emissions, while others will treat the issue as part of financial performance. Additionally, BlackRock and Vanguard are experimenting with allowing index fund clients to cast their own votes by choosing a voting philosophy—from pro-worker to ESG opponents to Catholic values. This model could complicate ESG campaigns, but the principle should set a precedent. Since investor pressure significantly impacts corporate behavior, the actual owners, not their appointed fund managers, should have the say.