The proliferation of efforts by right-wing politicians to restrict the use of ESG in the US is prompting concern and frustration among the investor community.
Responsible Investor has reported on multiple attempts to introduce anti-ESG legislation, threats to divest state assets from companies that boycott oil and gas, as well as criticisms of state-level ESG assessments, and even an investigation into shareholder engagement network Climate Action 100+ looking at “potentially unlawful market manipulation”.
“Thwarting actions are on the rise to discredit ESG and the numerous social and environmental issues under that term – racial justice, reproductive rights, climate action, mass incarceration, et al,” says Marcela Pinilla, director of sustainable investing at Zevin Asset Management.
Another investor notes: “We are seeing politicians looking at ways to control the narrative on issues in a manner consistent with a conservative agenda, including fossil fuels.”
As several investors point out, however, targeting ESG investing as a way of pursuing this agenda suggests a lack of understanding of the topic.
New York City Comptroller Brad Lander, tells RI: “As trustee and investment adviser to one of the largest pension systems in the nation, considering ESG factors is an essential part of ensuring that our decisions maximise long-term risk-adjusted returns. The proposed legislative actions we have seen cropping up across the nation are deeply misguided and will prohibit fiduciaries from acting in the best interests of their beneficiaries. Legislatures are not fiduciaries.”
Another US investor agrees. “For us, ESG is a financial factor. It’s not what we feel, it’s not a policy statement. For us it has an impact on our returns and long-term view. And without question, how a company manages their ESG risks is part of whether they will succeed and thrive in the long term.”
The Office of the NYC Comptroller specifically criticises efforts by the American Legislative Exchange Council (ALEC), an influential nonprofit organisation of conservative state legislators and private sector representatives, to coordinate an anti-ESG legislative push. “[ALEC’s] proposal restricts the ability of fiduciaries to take prudent action in the best interests of the funds. It is widely accepted among investment professionals that consideration of ESG factors in investment decision making addresses financial risks that help determine whether investments will generate superior long-term risk-adjusted returns. Removing this tool from the investment toolbox is as misguided as removing any other risk analysis tool.
“Every pension trustee should have the ability to take all investment considerations into account when making prudent decisions, unrestricted by the biases of these legislators.”
ALEC had not responded to a request for comment at the time of publication.
Similarly, an investor among those asked by Texas comptroller Glenn Hegar whether they “boycott” energy firms tells RI: “We are not boycotting the fossil fuel industry, we don’t have exclusions at the firm level with regards to oil and gas. A lot of our exclusions are client-driven. At the same time, 80 percent of governments in the world have net-zero commitments. This is a structural trend and we as investors need to be mindful of this. It’s not moral grandstanding. We as the fiduciary for clients’ assets have to be aware of those risks.”
Another investor adds: “It’s appropriate for any actively managed portfolio to think about E, S and G risks and opportunities as part of valuation – we’re already doing this, and clients are benefiting from it whether they want to, like it or not. And that’s not going to go away.”
Jonas Kron, chief advocacy officer at Trillium Asset Management, says that in this respect lawmakers are “trying to throw a rock into a river”. “There’s a certain momentum that has developed in ESG both for corporates and finance that these legislators are not going to be able to hold back, as much as they may try.”
Investors also note that, perhaps because of these contradictions, several of the anti-ESG moves have already proven problematic for their initiators.
“You see legislators tying themselves in knots in writing these laws that don’t make sense,” says Kron. “Indeed, when they try and implement them, they end up hiring firms they should be boycotting. I think this demonstrates a certain lack of financial literacy and understanding. They fall victim of their own logic quite quickly.”
One investor points to a “rather comical – but perverse nonetheless – outcome” in which it was reported that Texas’s second-largest public pension fund, Employee Retirement System (ERS) of Texas, voted by proxy in favour of net-zero financing proposals. This was despite legislation banning investment by state pension funds in companies divesting from fossil fuels.
RI asked ERS for comment but had not received a reply at the time of publication.
Nevertheless, investors warn that there are real risks surrounding the anti-ESG drive. “Already we’re seeing some companies – depending on where they operate and corporate culture – starting to hesitate on making public commitments,” says one. “Even progressive companies with large footprints in these states are treading carefully around public disclosure on certain business decisions. We’ve also seen hesitancy among some companies who may have otherwise joined public policy engagements on progressive climate policy.”
Investors who spoke to RI agree that more anti-ESG legislation and sentiment can be expected, especially with mid-term elections coming up in the US. There are fears that, if Republicans regain control of the House, they will attempt to undermine ESG regulation. Kron also notes that right-wing legislators will “learn from their mistakes”. “We shouldn’t expect the ham-fisted drafting we’ve seen to necessarily continue.”
This is likely to exacerbate the challenges facing investors, who will have to balance sustainability commitments and the need to incorporate ESG risk assessments with the desire to avoid political entanglements and alienating part of their customer base.
For some ESG and SRI investors, the answer is simple. “As investors and companies, we have to make a decision on whether we are going to stay true to our north star of sustainability or acquiesce,” says one.
Kron agrees: “We have demonstrated over a significant period of time the strength and merit of our approach. We need to stick to our knitting and demonstrate our strength through our performance and impact and results.”
He also argues that investors need to continue making their voices heard on policy, as they did regarding changes to Department of Labor rules on ESG during the Trump era.
Another investor puts it more bluntly: “If investors and corporates don’t take the time to make the case of why ESG is part of their bottom line decision making, then they’re falling down on the job.”
At the same time, Marina Severinovsky, head of sustainability North America at Schroders, says investors should be “genuinely respectful and empathetic” in their engagement with legislatures. “States like Texas understand the physical risk of climate change and Americans are experiencing these changes across the country. People do understand the impact on the environment, so it’s about having empathy that these people care a great deal and that they also have to consider the local economy.”
Some investors also question the characterisation of the various legislative initiatives as “anti-ESG”. A senior executive at a large US asset manager says: “My take on it is that’s it less about anti-ESG and more about anti-regulation and big government. It’s about the implications of how things like exclusions are being interpreted as moral or philosophical attacks on certain industries, as well as being anti-regulation.”
The executive notes, however, that their firm is watching developments. “We need to.”
Another investor also takes a pragmatic view. “As asset managers we have to learn to live with this reality. We need to be consistent in our messaging about ESG and be up front about it. Obviously, there will be consequences – you can’t please everyone.”