Institutional investment firms and activist asset managers are amplifying their message to congressional and state lawmakers: Stop equating environmental, social and governance investing with a political agenda.
Investors of all sizes are doubling down on the importance of ESG considerations ahead of midterm elections that will determine party control of Congress and state legislatures across the country.
At stake is a growing body of legislation and regulations in states such as Texas, Oklahoma and Louisiana aimed at curbing ESG investment and, in some cases, divesting from certain financial institutions over investment policies that incorporate ESG factors such as climate risk and human capital management.
ESG critics largely argue that such considerations are politically based and immaterial. To date, at least 17 states are proposing rules that would nearly ban the use of ESG factors.
Those sentiments have trickled up to the federal level, where Republicans in both chambers, including Sen. Steve Daines of Montana and Rep. Bill Huizenga of Michigan, are eyeing similar restrictions if their party takes control of Congress in the midterms.
Major financial institutions, however, contend that the consideration of at least some ESG factors is a mainstream and responsible approach to investing, and those issues are often material to thousands of companies in industries they invest in, including utilities, manufacturers, insurers and consumer goods producers.
“It’s not imposing one’s values on how you’re running portfolios,” said Joe Amato, president and chief investment officer of equities at Neuberger Berman Group LLC, which manages approximately $418 billion in assets.
“If you look at General Motors, you’d be irresponsible if you didn’t consider their strategy in electric vehicles,” Amato said. “You just considered an ‘E’ factor, okay? You’d be irresponsible if you didn’t understand what their relationship is with their labor unions. That’s an ‘S’ factor. There, you just had ESG-integrated investment decision-making.”
ESG assets seen increasing
Asset managers globally are expected to increase ESG-related assets under management to $33 trillion by 2026, from $18.4 trillion in 2021, according to PricewaterhouseCoopers. The firm’s base-case growth scenario for the U.S. shows ESG-oriented assets under management more than doubling to $10.5 trillion by 2026.
“There is a groundswell of demand that isn’t necessarily reflected in the rhetoric that takes place in statehouse offices around the country,” said Sam Hodas, managing director and head of enterprise ESG strategy at Nuveen, the asset management arm for the Teachers Insurance and Annuity Association of America.
One of the hurdles that portfolio managers, financial advisers and others now need to clear is distinguishing various definitions that have become conflated, Amato said during a conference last week hosted by the Psaros Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business in Washington.
Integrating ESG factors that are financially material with other significant issues is about the actual investment process, he said. It is separate from sustainability, impact investing and exclusions, which are investment approaches focused on seeking particular outcomes based on clients’ goals or investment strategies.
“Regulators and the folks at the end of Pennsylvania Avenue need to understand the subtleties of what we’re talking about, and not group things together that should be separated,” Amato said. “I don’t really see it ending because I think those politicians and groups of folks have made a big deal out of it, and it plays well on certain main streets, so they’re going to continue to pound on our industry and our advice.”
State treasurers have also ratcheted up anti-ESG policies, often to comply with recently enacted state laws. Missouri State Treasurer Scott Fitzpatrick this week announced that the Missouri State Employees’ Retirement System pulled approximately $500 million from public equities managed by BlackRock Inc.
“Fiduciary duty must remain the top priority for investment managers — a duty some of them have abdicated in favor of forcing a left wing social and political agenda that has failed to succeed legislatively, on publicly traded companies,” Fitzpatrick, a Republican, said in a statement.
BlackRock, which manages about $10 trillion in assets, and its Chairman and CEO Larry Fink have been particularly targeted by these attacks on ESG. Officials in Utah, West Virginia, Louisiana and others have made similar moves to divest from the world’s largest asset management firm.
That prompted the firm this month to reiterate in a post on its website that it has invested $170 billion on behalf of its clients in U.S. energy and fossil fuel companies, including those building and maintaining pipelines and power plants, and its portfolio managers “do not dictate how clients should invest.”
“We’re giving clients that choice and access,” BlackRock President and director Robert S. Kapito said during the firm’s earnings call last week. “And there are many clients who still believe that investing in sustainable strategy is the right long-term strategy. And that is giving them the choice to invest, and other clients may have different views.”
While neither BlackRock nor other major financial institutions have announced complete boycotts of fossil fuel companies, they have adopted investment policies to reduce exposure to coal, oil and gas; help borrowers lower their emissions; or engage with companies they invest in on improving strategies to decarbonize their businesses.
“Corporations and investors should be neither glorified nor vilified for pursuing what they determine is in the best interests of their stakeholders or clients,” according to Michelle Buckley, portfolio manager at Boston Common Asset Management LLC.
Companies’ awareness of ESG and sustainability is key to long-term business success, Buckley wrote in the ESG investment firm’s third-quarter update this month. Meanwhile, investors have used the mosaic theory, which incorporates various information to inform investment decision-making, in fundamental analysis for decades.
“Thinking about a company’s environmental, social or governance practices or deciding to exclude certain industries because one’s opinion on their long-term outlook suggests secular decline is really nothing new,” she added. “Good investors and pivotal executives have pondered these facets of due diligence since the dawn of modern investing.”
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