US political moves against environmental, social and governance (ESG) investing have implications for European asset managers, but hopefully will not be replicated on this side of the pond
- Two recent political moves in the United States deserve the attention of impact investors
- Texas state comptroller Glen Hegar published a list of financial companies “boycotting” oil and gas companies and ordered state pension funds to divest from them
- Florida has adopted a resolution that prevents state fund managers from considering ESG factors in their investment strategies
- The mood music in Europe, enshrined in the SFDR regulatory framework, should protect European investors from catching this infection
Last month, Glen Hegar, the state comptroller of Texas, published a list of financial companies and funds which he said are boycotting oil and gas companies. He went further ordering state retirement and school funds to divest holdings in those funds, and to stop investing with those companies.
In other words, Texas has put ESG investing on a par with investing in Iran.
Hegar was unflinching. “The environmental, social and corporate governance movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” he said.
Texas is not alone. In Florida, the Republican governor Ron DeSantis and the State Board of Administration (SBA) have adopted a resolution which actually prohibits state fund managers from considering ESG factors in their portfolio strategies. In updating their fiduciary duties, the SBA directs them only to weigh “pecuniary factors”.
Jonathan Rose, founder of Jonathan Rose Companies and a leading figure in the impact investing industry, tells Impact Investor: “What Florida and Texas have done is political grand standing to the detriment of both the people of those states, and most particularly the pensioners who those states’ funds are supposed to benefit.”
The impact on asset managers is particularly worrying. Rose continues: “As we enter a new era of ‘polycrisis’ where there is systematic interaction between the different major investment risks such as climate change, energy price volatility, inflation, rising interest rates etc, the focus of investment managers should be on seeking the most resilient of investments to manage risks. That should and must include climate change resilience.”
“I therefore think what Florida and Texas are doing appears to be irresponsible from an investment fiduciary point of view and will be to the detriment of their funds’ returns.”
European asset managers in the frame
Texas’s wrath seems to be highly Europe-focused. The state looked at some 350 companies and gave them 90 days to respond before producing a final blacklist of ten houses.
US giant BlackRock is on this final list but the other nine are all European houses. BNP Paribas, Credit Suisse Group, UBS Group AG, Danske Bank, Jupiter Fund Management, Finland’s Nordea Bank, Schroders PLC, and Swedish banks Svenska Handelsbanken AB and Swedbank AB.
Black Rock issued a statement saying they did not “believe this was a fact-based decision”, and critics of the process told the Financial Times that letters were sent to out-of-date addresses and even retired executives. They also sight that only one ESG ranking system was used – MSCI’s.
Lourenco Miranda, managing director of ESG and sustainability solutions at EisnerAmper says the impact on European funds will depend very much on their chosen SFDR classification.
“Asset managers who are seeking Article 9 (dark green) or Article 8 (light green) could be impacted in various ways and degrees. The Texas regulation will have the biggest impact on European asset managers seeking SFDR Article 9 classification for their funds as it prohibits investments in oil companies. However, due to the rules outlined in the European Taxonomy for sustainable activities, asset managers can continue to claim SFDR Article 9 and not divest in gas companies as it is considered a transitional fuel.”
In Miranda’s view firms seeking Article 9 classification will see an immediate impact. ”It’s likely they will not be able to invest in Texas and the regulation can pose challenges for working with US regional banks.”
The impact of firms seeking an Article 8 classification is more nuanced. “Article 8 allows asset managers to invest in fossil fuels, but managers need to showcase that these are the best-in-class companies that have a strong sustainability case.”
Will this spread to Europe?
Rose fears this pushback against sustainability will spread to other states in the United States, although it will only impact those funds and fund managers of Pensions and other assets which are controlled by those states.
But when asked if there are similar risks in Europe, he is clear. “No. I think the investment climate in Europe is very different. Most European investors see the alignment between investment considerations and environmental ones. They have a strong commitment to ESG and to strong investment returns.”
In his conversations with investors globally he says he is seeing “the absolute opposite to what Florida and Texas are doing.” In Europe this is particularly so, as the SFDR changes are being welcomed by European pension funds and they are increasingly allocating a percentage to Article 8 and 9 funds. He concludes “This is therefore a US aberration.”
Certainly in Europe the pressures from the end clients seems to be all in the opposite direction. Charlotte O’Leary, the CEO of Pensions for Purpose says, “asset managers are increasingly being pushed by their asset owner clients to go further and faster on abating carbon emissions in their portfolios because of the impact goals being set but also in recognition of greater transparency and reputational risk”.
Karen Shackleton, founder of Pensions for Purpose, says this is part of a wider trend. “We have seen a noticeable increase in interest from pension funds interested in introducing purpose to their investments. To give you an indication of the level of interest, we now have nearly 200 representatives of pension funds (officers or trustees) joining our forum discussions on how to do this. When we launched in 2017, the number of pension fund representatives were in single figures.”
Having said that, O’Leary sees the move in Texas of interest for another reason. “How we meet impact goals, such as net zero, is a bigger question. Arguably holding fossil fuel investments to encourage those companies to change practices and transition is far more powerful than disinvesting and potentially pushing those assets into private hands or to those who will not engage. Engagement must be the best first course of action.”
Nonetheless, O’Leary is clear “engagement without the ability to disinvest becomes an empty threat, so regulators and politicians need to be careful about disarming those that have the greatest set of tools to push fossil fuel companies to transition”.