A dangerous precedent – or has ESG gone too far?
Written by Charlie Barlow, VP Fund Manager Partnerships, Tumelo.
Since January 2022, more than 44 proposals (bills) across 17 states in the US have been tabled that resist the concept of ESG (Environmental, Social and Governance) at both state and federal levels. Proposals include banning state entities from working with banks that have restrictions on lending to fossil fuels, emphasising how ESG has become so politicised in the US. But does the cancelling of ESG policies potentially come at a cost, not just to the future of our planet, but in financial returns?
When the State of Texas enacted laws in 2021 to prohibit municipalities from contracting with banks that have specific ESG policies, five municipal lenders exited from the state, a decision that The University of Pennsylvania estimated drove up interest rates by $303-$532m during the subsequent eight months (1).
In recent weeks, the Texas State Controller passed a resolution insisting that BlackRock and other fund managers invest state funds in a manner that prioritises returns, without considering ESG's ideological agenda. Governor Ron DeSantis commented that "corporate power has increasingly been utilised to impose an ideological agenda on the American people" and that investment managers should prioritise "the financial security of the people of Florida over whimsical notions of a utopian tomorrow". While BlackRock inevitably stole the headlines as the world's largest asset manager, nine European fund manager names appeared alongside a list of 348 mutual funds marked for divestment of some of their current holdings.
Criticism of the ESG movement includes the notion that fund managers no longer make investment decisions in the best interests of their shareholders, with financial returns secondary to the ESG agenda. ESG champions respond that by politicising state pension funds, regulators are restricting access to investments that could support retirees' financial returns, which is inconsistent with their duties.
The reaction from the fund management community to the State of Texas has been resolute, with UBS objecting to being on the list, claiming they "do not boycott energy companies" and "their focus on maximising shareholder value remains unchanged." Republican lawmakers in the US are unlikely to yield their position with US mid-term elections approaching. Their partisan attacks on asset managers investing in ESG (a $35 trillion industry) put ESG at the heart of the so-called culture wars.
Asset managers are walking a fine line as they try to appease both sides of the widening political spectrum. Offering shareholders the opportunity to vote directly on their investments could potentially release asset managers from this regulatory and reputational tight-rope. With this kind of service, investors would have the freedom to support or reject ESG-focused proposals at companies, in alignment with their beliefs.
1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4123366