View from the US: ESG industry begins to defend against ‘woke’ investment critics

'Firms should not be shying away from saying ESG strategies are seeking long-term value and seeking risk'

Over here in the US, ESG has been a punching bag among conservatives singling out the issue in a election year – and the American sustainable investing world is starting to respond to attacks after mostly sitting quietly.

Last week, US SIF, the Forum for Sustainable and Responsible Investment and US equivalent of the UK Sustainable Investment and Finance Association (UKSIF), launched a campaign with a new website called ESG Truths, seeking to dispel a growing amount misinformation about sustainable and responsible investing.

This coincided with Florida governor Ron DeSantis effectively banning the state’s pensions from considering ESG factors in investment decisions and the Texas comptroller publishing a blacklist of fund providers and products.

“A lot of folks in our space are uncomfortable about it being a political thing. These are sound financial strategies with rigor behind them,” said Bryan McGannon, director of policy and programs at US SIF. “It’s not natural for them to engage at a political level. That has kind of held the community back. It was important for us, as a membership organization, to get out there and put a marker in the ground and say: ‘This is what sustainable investing is.’”

The new website from US SIF outlines 10 themes around ESG, such as sustainable investing representing the free market, being used to reduce risk and helping address climate change, to try and educate US investors around why this is a necessity not a ‘nice-to-have’.

Enemy No. 1?

Let’s take a look at what’s going on. Amid the wider, hyper-partisan culture wars seen here, ESG has been swept up in the crusade against what opponents all “woke” capitalism.

For reasons that have largely baffled the sustainable investing industry, critics have painted BlackRock as the country’s ESG leader, incorrectly claiming the company boycotts fossil fuel holdings.

This has put the company at odds with Texas’s relatively new law that prohibits state pensions from working with investment managers that exclude oil and gas companies.

As a result, BlackRock quickly came out to fight that categorisation, noting in a statement to ESG Clarity the firm invests more than $100bn in Texas energy companies on behalf of clients – a boast that would make some ESG-minded investors wince. Even some of the company’s products that bear an ESG label include fossil fuel holdings.

Meanwhile however, in an interview with Bloomberg, one BlackRock executive described the Texas measure as being bad for business in the state.

But, Andy Behar, CEO of US non-profit As You Sow, has highlighted is the state-level actions against sustainable investing are “like a blackhole of misinformation and misunderstanding.”

“It seems like they’re intent on hurting Texas oil companies,” Behar said. “A lot of funds they’re excluding – one of them has 340 fossil fuel companies in it. They don’t seem to be focused on anti-oil. They seem to be focused on political theater.”

Texas named 10 investment companies in its list, along with products from those firms and numerous others totaling nearly 350 mutual funds and ETFs. It is unclear why the state included some names on the firmwide list, while excluding others whose products were on the lengthier fund list. None of the companies it calls out specifically appear to be pure sustainable investing firms, and most are non-US headquartered.

Fiduciary duty

The overriding message from the global investment industry – not just in the States – is that ESG is considered as a material issue and not something done only for the sake of making the world a better place.

“We are not sure how [the investment ban] is going to play out, because it is so misguided and has nothing to do with ESG. ESG is a framework for evaluating risk,” Behar explained. “Any fiduciary who says, ‘I’m not going to evaluate risk’ is not doing their job and should be fired.”

Sustainable investment providers are planning ways to counter the anti-ESG narrative, and there will likely be more efforts soon, US SIF’s McGannon added.

“Firms should be reaffirming that their sustainable and ESG practices are robust and add value for their customers,” he said. That means “not shying away and being very forthright about these strategies [being] good, and [saying] they are seeking out long-term value and avoiding risk.”

What to say and how to say it

Jody Lowe, president and managing director of financial communications firm Lowe Group, said she advises clients – sustainable investors or not – to avoid partisanship.

“Our message to them is very much about being transparent and educational in describing exactly what you do,” Lowe said, adding to respond to misinformation around ESG the group has “encouraged people to write articles, share data, just get information out there.”

Institutional investors in particular are wary of partisanship, given regulatory constraints they face and generally considering what they do as apolitical, she said. Describing investment processes and considerations makes for a more informed client base, she added.

“The more sustainable investors can do to engage in that conversation, the better,” Lowe said. “As time goes by, [customers] will be able to see the real and meaningful information they need to make investment decisions.”

The anti-ESG movement is not yet out of control, and part of the reason for that is the partisan nature of it, said Gil Bashe, chair, global health and purpose at Finn Partners.

“In the context of the world we live in today … we’ve broken down into tribes. Those tribes pay attention to each other, but they no longer engage with each other,” Bashe said. “That is a danger to our society.”

For people who understand ESG factors are part of the operational and cultural aspects of businesses, and affect stakeholders, the negative opinions on ESG have had no sway, he said.

That is not fundamentally different to the differences seen in response to Covid, where states with strong social and infectious disease programs saw lower death rates, he said.

“Look at the companies that are committed to ESG. You will find they are some of the most successful companies in the business world,” he said.

Businesses that are dedicated to considering ESG factors should be able to communicate authentically with employees, shareholders, customers and the public in a way that is comfortable for them, he noted.

“Wherever you have partisan thinking, each side can yell louder to be heard,” he said. “We owe it to ourselves to listen to the reasons and rationale of those who chose to disregard ESG as a pathway to learning.”