ESG adoption continues at a steady pace, with most developed countries folding environmental, social, and governance data into their investment process. Its momentum in the U.S., however, has slowed in part due to an “anti-ESG” push coming from conservative state politicians seeking to preserve the fossil fuel industry’s access to capital.
ESG and sustainable investing are part of a confusing landscape to begin with, and the recent political posturing – largely rooted in misperception and misunderstanding of what ESG is – just adds to the chaos. But it's important not to lose sight of the fact that as anti-ESG bills are brought up for vote at state legislatures, they are falling apart under scrutiny.
Institutional Investor detailed the political morass in The Backlash Against ESG Faces Its Own Backlash, outlining what led states to determine that ESG is not the enemy for their regional economies and taxpayers.
A few examples noted in the breakdown:
In Indiana…the Legislative Service Agency’s Office of Fiscal and Management Analysis estimated that a bill requiring that the state pension system, and a few others, divest from firms engaged in ESG investing would cost $6.7 billion over the next decade — lowering returns for the defined benefit pensions from 6.25 percent to 5.05 percent annually.
...In North Dakota, a bill that would blacklist financial institutions deemed to be boycotting energy companies failed last month, in a 90-to-3 vote, after the North Dakota Department of Financial Institutions opposed it, in large part because of the lack of due process for those on the blacklist.
...Even bankers in West Virginia, where the coal industry remains powerful, are against the financial boycott legislation, [writing that] “Our members are hopeful that you also respect our concerns with the significant government intrusion this legislation presents into the day-to-day operations and private business affairs of West Virginia’s banks and the dangerous legislative precedent this bill will establish.”
What Does this Mean for Investors?
Kudos to the states that pushed back for recognizing that the goal is to support investors, not fossil fuels (or any other industry, for that matter). States that block asset managers and owners from integrating ESG into their research are inserting politics into investing, which by its very nature meddles with fiduciary obligation.
What Should Financial Advisors Do?
If clients are concerned by the political rhetoric about ESG, advisors should note that politics and investing do not go hand in hand. Regulators can put guardrails around ESG – which is indeed happening – and the markets themselves will be the judge of whether ESG is a valuable part of the investment process.
For content and communication starters that help clarify the client conversation about ESG, take a look at our Digital Products.