The Growing Backlash Against Mission-Driven Investing in the US
ESG investing, which involves considering environmental, social, and governance factors in investment decisions, has gained popularity in recent years, with a growing number of investors integrating ESG criteria into their portfolios. However, Republican lawmakers in the US have introduced at least 49 anti-ESG bills, reflecting a political backlash against mission-driven investing. These lawmakers argue that ESG frameworks place unnecessary restrictions on corporations and undermine financial returns. Asset managers such as BlackRock, Vanguard, and State Street have come under fire for using ESG methodologies, with some Republican state treasurers withdrawing billions of dollars from their funds. While some argue that the ESG backlash may have long-term consequences on the US investment industry’s global competitiveness, others believe that it is more symbolic than substantive.
Possible Consequences of the ESG Backlash in the US Investment Industry
The ESG backlash in the US may have long-term consequences on the investment industry, especially from the perspective of its global competitiveness. Some possible consequences are:
– Reduced interest in ESG investing: The anti-ESG legislation may discourage some investors from integrating ESG considerations into their investment decisions, leading to reduced demand for ESG funds and products. This could limit the growth of the ESG market and hurt US-based ESG fund managers and asset owners.
– Strained relationship between asset managers and Republican politicians: The attacks against BlackRock, Vanguard, and State Street by Republican state treasurers may create a rift between asset managers and Republican politicians, making it harder for them to lobby for pro-ESG policies or engage in constructive dialogue.
– Risk of regulatory fragmentation: The ESG backlash may create a regulatory patchwork, with different states adopting different ESG standards and requirements or rejecting ESG considerations altogether. This could complicate the compliance and reporting process for asset managers, making it harder for them to attract global investors or compete with ESG-friendly firms in other regions.
– Increased litigation and reputational risk: The ESG backlash may expose asset managers to legal and reputational risk, especially if they are accused of violating their fiduciary duties, misrepresenting their investment strategies, or failing to align their ESG policies with investor expectations. This could lead to costly lawsuits, damaged brand reputation, and loss of clients.
How Asset Managers Using ESG Methodologies Can React to the Discussions in the US
If you are the CEO of an asset manager using ESG methodologies, you may react to the discussions in the US by:
– Engaging in constructive dialogue with policymakers: Instead of adopting a confrontational approach, you could try to engage in constructive dialogue with Republican politicians and explain the benefits of ESG investing for both investors and corporations. You could also share data and research that support the positive impact of ESG on financial performance and risk mitigation.
– Emphasizing the fiduciary duty to integrate ESG: You could highlight the fiduciary duty of asset managers to integrate ESG considerations into their investment decisions, as it is in the best interest of their clients to consider the long-term risks and opportunities related to environmental, social, and governance factors. By stressing the financial materiality of ESG, you could counter the argument that ESG compromises financial returns.
– Addressing the concerns about ideological bias: You could address the concerns about ideological bias by clarifying that ESG does not promote a particular political or social agenda but reflects the evolving expectations of investors and society as a whole. By emphasizing the transparency and objectivity of ESG methodologies, you could alleviate the fears of politicization or discrimination.
– Communicating the value proposition of ESG: You could communicate the value proposition of ESG as a way to enhance portfolio performance, manage risk, and align investments with societal and environmental goals. By highlighting the positive impact of ESG on firm reputation, customer loyalty, and employee engagement, you could make the case that ESG is not a trade-off between financial returns and societal impact but a win-win strategy.
How Board Members of US Corporations Can Respond to ESG Reporting Requirements
If you are a board member of a US corporation, you may respond to ESG reporting requirements by:
– Integrating ESG considerations into the business strategy: Instead of treating ESG as a compliance issue or a public relations exercise, you could integrate it into the core business strategy and operations of the company. This could involve identifying the material ESG risks and opportunities of the business, setting targets and metrics for ESG performance, and aligning the compensation and incentives of executives and employees with ESG goals.
– Engaging with stakeholders on ESG: You could engage with stakeholders, including investors, customers, employees, communities, and regulators, on ESG issues and concerns. This could involve disclosing relevant ESG information and data, listening to feedback and suggestions, addressing grievances and disputes, and collaborating on ESG initiatives and projects.
– Ensuring the quality and credibility of ESG reporting: You could ensure the quality and credibility of ESG reporting by adopting recognized ESG frameworks and standards, such as the Global Reporting Initiative, the Sustainability Accounting Standards Board, or the Task Force on Climate-related Financial Disclosures. You could also establish rigorous internal controls and oversight mechanisms to verify the accuracy, completeness, and consistency of ESG data and information.
– Integrating ESG into risk management and governance: You could integrate ESG into risk management and governance by incorporating ESG risks and opportunities into the enterprise risk management framework and by having ESG expertise and oversight at the board level. This could help the company to identify, assess, monitor, and mitigate ESG risks that could impact financial performance and stakeholder trust.
Suggestions for European Institutional Investors or Corporations Interested in Doing Business in the US
If you are a European institutional investor or corporation interested in doing business in the US, you may:
– Be aware of the regulatory environment: You should be aware of the regulatory environment in the US regarding ESG investing, especially if you plan to invest or do business in states that have introduced anti-ESG legislation. You should also familiarize yourself with the ESG reporting and disclosure requirements in the US and ensure that they align with your own ESG policies and preferences.
– Choose ESG-friendly partners and markets: You may choose ESG-friendly partners and markets in the US, such as asset managers or corporations that have a proven track record of integrating ESG considerations into their investment decisions or business operations. You may also consider investing in or doing business with states that have pro-ESG policies or initiatives, such as California or New York.
– Understand the cultural and social context: You should understand the cultural and social context in the US when it comes to ESG investing, as different regions and populations may have varying attitudes and priorities regarding ESG issues. By being sensitive to the local context and engaging with stakeholders in a respectful and inclusive way, you could build trust and credibility as an ESG investor or business.
– Educate and inform stakeholders: You should educate and inform your stakeholders, such as clients, employees, or regulators, about your ESG policies, strategies, and performance. By being transparent and proactive in communicating about ESG, you could differentiate yourself from competitors and enhance your reputation as a responsible and ethical investor or business.
Summary
The growing backlash against mission-driven investing in the US, reflected in the anti-ESG legislation introduced by Republican lawmakers, may have long-term consequences on the investment industry’s global competitiveness and may expose asset managers to legal and reputational risk. Asset managers using ESG methodologies can react to the discussions by engaging in constructive dialogue, emphasizing the fiduciary duty to integrate ESG, addressing the concerns about ideological bias, and communicating the value proposition of ESG. Board members of US corporations can respond to ESG reporting requirements by integrating ESG considerations into the business strategy, engaging with stakeholders, ensuring the quality and credibility of ESG reporting, and integrating ESG into risk management and governance. European institutional investors or corporations interested in doing business in the US may be aware of the regulatory environment, choose ESG-friendly partners and markets, understand the cultural and social context, and educate and inform stakeholders.
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Tima Bansal is Professor and Diane-Laure Arjaliès Associate Professor at Ivey Business School
Action to block the use of “green” filters by asset managers in a growing number of US states reflects a growing political backlash against mission-driven investing, with high relevance to students of business.
According to deal data provider PitchBook, 61 percent of North American investors requested environmental, social and governance (ESG) criteria to at least part of its portfolio in 2022, up from 58 percent in 2021.
But while many investors and fund managers want to use ESG frameworks to identify promising investments that also advance social goals, some Republican lawmakers have argued that they place unnecessary restrictions on corporations and undermine financial returns. At least 49 anti-ESG bills have been introduced in the US this year, according to the Ropes & Gray law firm. Twenty-two were introduced in 2022.
Politicians have accused asset managers including BlackRock, Vanguard and State Street of failing in their fiduciary duty. They argued that applying ESG to business decisions compromised financial returns, though the evidence is less clear.
black rock, the world’s largest asset manager and ESG backer, was targeted by Republican state treasurers from Arkansas, Utah, Texas, Florida, Louisiana, Missouri, Arizona, North Carolina and West Virginia, who withdrew billions of dollars from your funds. Other states have threatened to follow. Florida Republican Governor and Presidential Candidate ron desantis it has accused corporations of using it to impose an “ideological agenda on the American people through the perversion of financial investment priorities under euphemistic banners.”
Last August, his home state demanded that state pension funds prioritize the highest return on investment without considering non-pecuniary factors.
Target: Several Republican state treasurers withdrew billions of dollars of funds from asset manager BlackRock © Bloomberg
However, such attacks have also met with resistance. The Indiana Bankers Association, which represents 116 banks, is lobbying against legislation that would require the state to undo and cancel contracts with financial groups that they consider “social, political or ideological” factors.
There is also debate over the symbolism versus the substance of such “anti-wake” movements. Researchers led by Shivaram Rajgopal in Colombian business school recently concluded that the effect of three Texas public pension plans defunding ESG funds was neither statistically nor economically significant. “The legislation appears to be a political stance and may have no other purpose,” she wrote.
questions in the classroom
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What are the possible long-term consequences of the ESG backlash on the US investment industry, especially from the perspective of its global competitiveness?
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As the CEO of an asset manager using ESG methodologies, how would you react to the discussions in the US?
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If you were a board member of a US corporation, how would you respond to ESG reporting requirements?
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What suggestions would you have for a European institutional investor or corporation interested in doing business in the US?
Learn more about the ESG backlash at www.ft.com/esg-investing
In March, Joe Biden vetoed his first bill: a Republican-led initiative to prevent pension fund managers from basing their investment decisions on ESG. He argued that the legislation “would put the retirement savings of people across the country at risk.”
Although some investment funds welcomed Biden’s decision, they have reconsidered ESG investing. Vanguard, the world’s second-largest asset manager, has withdrawn from the Net Zero Asset Managers initiative, a coalition of 301 investors committed to reducing greenhouse gas emissions. His chief executive said Vanguard had no right to tell the corporations he invested in what to do and that his voice was being muffled or confused.
Similarly, BlackRock removed the largest sustainable fund in the US from one of its popular portfolio allocation strategies. Investors did not react well, drawing $6.5 billion from the fundabout a third of BlackRock’s total assets, according to Morningstar.
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Despite the acrimony in the US, the EU has gone ahead with supporting ESG. In January, it adopted the Corporate Sustainability Reporting Directive, which requires companies that operate in the EU or have listed securities in the bloc to disclose their ESG activities.
It forced not only 50,000 EU-based companies, but also their suppliers, including US-based companies, to report.
Stephanie Turner provided additional research assistance.
https://www.ft.com/content/3f064321-138c-4c65-bbb9-6abcc92adead
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