"One of the more surprising aspects of Texas’ anti-ESG law, just unleashed on the likes of BlackRock Inc., is that it turns out to offer a great lesson on environmental, social and governance investing’s cousin, socially responsible investing, or SRI. Not intentionally, of course.
Over the past few months, there has been a concerted effort amongst political forces attempting to discredit the use of environmental, social and governance (ESG) information in the investment process via a media campaign and state laws that ban certain investment management firms that have been vocal about the (financial and societal) value of considering issues like climate change and diversity, equity and inclusion in the investment process.
The idea of limiting the kinds of data investors can use when making investment decisions is absurd, and these deliberate attempts to do so are dangerous for those who have entrusted the stewardship of their capital to investors that may be hamstrung by these laws.
There have been many excellent responses to these attacks from members and partners of IEN. Below is a selection of some of the articles we thought best articulated the value of integrating ESG factor in the investment process.
The articles below show that ESG information -- properly considered -- is essential to good investing in the 21st century. But it's also worth noting (given the political nature of the attacks) that the American people want companies to improve their performance when it comes to their impacts on people and the planet. Just Capital's survey results from earlier this year found that "Americans overwhelmingly support public disclosure on human capital and environmental impact metrics from America’s largest companies, and endorse federal action to require standardized disclosure" ... "85% of Americans agree that companies need to disclose more about their business practices and impact on society."
(We'll continue to add to this list -- if you have other good articles that we should add, please send them our way.)
ESG Investing Is Consistent With Fiduciary Duty | WSJ
"Transparency enables investors to make informed decisions with a greater understanding of the risks and opportunities facing a company. Yet incredibly, some American politicians are now trying to pass laws to prevent investors from taking highly relevant information into account."
Understanding the Role of ESG and Stakeholder Governance Within the Framework of Fiduciary Duties | Wachtell, Lipton, Rosen & Katz
"Attacks from the other end of the spectrum condemn board consideration of ESG in a stakeholder governance model as insufficiently prescriptive. Yet neither view, attempting to politicize the role of companies and their boards, grapples adequately with the real meaning of ESG and stakeholder governance and the role of these concepts in the decision-making process of corporate boards and management"
10 Things to Know About ESG and Sustainable Investing | ESG Truths
To counteract the false information circulating about ESG and sustainable investing, US SIF has launched the ESG Truths page. The page lists 10 reasons why sustainable investing is crucial in the coming years and is here to stay.
The backlash to climate-smart investing in the U.S. is based on a blatant lie - Mindy Lubber, Ceres, August 15, 2022
"This naked interference with the free market is playing out in certain parts of the U.S. A growing number of government officials at the state and federal levels — often with the support of fossil fuel interests — are working to undermine investments and loans to companies that are seeking to address the severe business risks related to the climate crisis, water scarcity and pollution, and other sustainability threats." ... "At the heart of this attack lies a blatant fiction: that climate-smart business practices are somehow a secondary, ideologically driven sideshow to the real financial concerns facing investors and companies. These state officials would have you believe that drought, crop failure, weakened infrastructure and worsening public health don’t stand as serious financial threats to business interests and our economy at large."
No Such Thing as “ESG Investing” - Erika Karp, Pathstone, August 16, 2022
"We should first state that there is no such thing as “ESG Investing.” Period. There is, however, such a thing as “ESG Analysis.” This is an essential investment discipline. ESG is not an asset class, it is not a style, and it is not a strategy. Again, simply stated, it is an investment research discipline. It need not be politicized, divisive, or represent any particular ideology. In fact, when it is used that way, it is entirely disingenuous and outright false." ... "And for those who are fiduciaries and stewards of wealth, it is absolutely critical to take a thoughtful and well-researched approach to making investment decisions. The approach considers quantitative data, engages in qualitative evaluation, and leverages deep and experienced teams to make decisions. Each investment decision requires an investor to form a judgement based on the available information relative to their risk profile and goals. But not all information is created equal. A successful investor sifts through the noise and identifies information that is material to driving investment outcomes."
The Anti-ESG Rhetoric and Actions of Republican Politicians Are Bad for Investors and Business - Jon Hale, August 26, 2022
"Nearly all asset managers have come to believe that considering climate and other ESG information is the prudent thing to do, helping them fulfill their fiduciary duties toward their clients. A Russell Investments survey of asset managers last year found that 82% of U.S.-based asset managers systematically incorporate ESG information in their investment process. The percentage approaches 100% in the U.K. and Europe.
They do so because ESG information gives them a more-complete picture when they evaluate an investment.
"...So the bottom line for asset managers and the companies in which they invest is that considering climate and other ESG-related risks and opportunities is about business, not ideology."
Some Reflections On An RSC Memo, ExxonMobil, And Tesla - Bob Eccles, Harvard Business School & Oxford University, August 4, 2022
"Some ESG funds did well when tech stocks were booming and oil stocks were lagging, but the reverse is now sometimes true. Not always. The Parnassus Endeavor Trust fund which doesn’t hold oil and gas companies has outperformed the comparable SPDR® S&P 500 ETF Trust over a 15 year period of time."
"...the RSC confounds ESG with impact. In fairness this is a common practice across the entire political spectrum. The distinction is a simple but important one. ESG is about a company’s operations and activities. Impact is about the positive and negative externalities of a company’s products and services."
Cutting Through the Nonsense Around ESG - Jon Hale, Morningstar, August 11, 2022
"Much confusion exists between approaches that use information about material environmental, social, and governance issues to achieve a more holistic view of an investment and those that emphasize the broader societal impact of an investment. In fact, ESG best describes the metrics and ratings that are inputs to investment decisions. Most often, ESG information is used to help manage risk, but many sustainable strategies also use it to help uncover investment opportunities."
ESG Ratings Are Bottom-Line Focused, but Have Broader Impacts - Jon Hale, Morningstar, August 11, 2022
"... this idea--that ESG concerns are financially material and therefore can affect a company's bottom line--is an essential element of sustainable investing and a key reason for its rapid growth.
Furthermore, they are also wrong to suggest this has nothing to do with the broader impact of companies on the world. The notion that ESG issues can affect companies financially is not inconsistent with the view that sustainable investors can achieve a broader impact on people and planet. In fact, the two ideas are closely connected."
GOP Fury Over ESG Triggers Backlash With US Pensions at Risk - Bloomberg, August 26, 2022
"Florida Governor Ron DeSantis this week banned state pension funds from screening for ESG risks. Texas is seeking to isolate financial firms it says are hostile toward the fossil-fuel industry. And in Arizona, Republican Senate nominee Blake Masters has characterized ESG scores as an existential threat to America... But the finance industry, which has embraced ever more ESG products promising to address issues like climate change and inequality, is starting to strike back, arguing that Republican policies put the financial security of US savers in serious jeopardy."
“DeSantis’s decision is clearly tied to politics because it’s certainly not in the best interest of pension fund beneficiaries,” according to Bryan McGannon, director of policy and programs at US SIF"
"...over the past five years, it has outperformed. US large-cap sustainable equity funds focused on growth rose at an average annual rate of 14% in the period, compared with 11% for conventional non-ESG funds, according to data provided by Morningstar Inc. ESG funds also did better when looking at global and European data from the researcher.
A study published in May by the European Securities and Markets Authority that looked at 6,528 so-called UCITS funds found that ESG generally improves returns and cuts client costs over time."
“Existing US securities laws require registrants to disclose any risks that are reasonably likely to have a material impact on their business, results of operation, or financial condition,” said Ken Rivlin, head of the international environmental law group at Allen & Overy. “Failure to disclose such material risks—including climate-related risks, if they’re material—could create a basis for liability.”
“It is pension money that runs the most significant financial risk if they don’t take ESG into account,” [Sasja Beslik] said. “ESG—when done for real—is first and foremost a risk-management tool. Politicians run for four years, maybe eight. But pension money is very long term.”
DeSantis may be swimming against the tide in his attack on ‘woke’ capitalism - Florida Phoenix, August 26, 2022
“With this issue of ESG integration, that horse has left the barn and it’s in the next county and the barn has burned down and a new one has been built. That’s ages ago; it’s kind of settled. This is just about getting the best data to make the best decisions. That’s all it is,” said Matt Orsagh of the CFA Institute, which trains financial advisers.
"According to Orsagh, ESG factors include how well a company governs itself — is there cronyism in the leadership, for example; whether it’s causing societal harm by, say, manufacturing in sweat shops; and damaging the climate. These considerations are material to a company’s prospects in a changing world."
Texas’ Answer to ‘Woke’ Investing Looks Kind of Woke - Liam Denning, August 29, 2022
ESG investing is often conflated with SRI. Both get lumped together as financial piety or under that term now so overused and abused your dad probably says it, “woke.” They are not the same thing. SRI is based on values and most commonly exclusionary: “I don’t want to fund X undesirable sector, so I won’t give it my money.” ESG is based on risk and more nuanced: “I foresee risks related to ESG issues that may either impair or enhance a security’s value, take account of measures to address those, and then under or overweight it accordingly.” SRI is about maximizing virtuousness; ESG is about maximizing wealth."
“ESG” strikes a nerve, why it shouldn’t - Dave Zellner, CIO, Wespath Benefits and Investments, August 31, 2022
"As a faith-based, not-for-profit investor responsible for the financial security of more than 100,000 benefit plan participants and 140 institutional investors, we strongly believe long-term investment success requires a sustainable global economy: one that holistically considers the systemic risks that pose serious threats to world economic development, robust financial markets, and ultimately our investment portfolios.
"We focus on integrating sustainable investment through our Sustainable Economy Framework. We recognize that the world is complex and there is no “magic formula” for achieving a sustainable global economy. We accept the validity of some anti-ESG critics who point to oversimplification or overpromising related to ESG. However, we do not believe ESG is a bogeyman, lurking out of sight, waiting in the wings to say “gotcha.” It is a proactive investment strategy where investors seek to understand how sustainable investment issues can positively or negatively affect their portfolios.
"Prudent asset owners must understand how public policy may impact specific market sectors, and how political instability in certain areas of the world can affect global economies. We cannot ignore the complexities of myriad environmental, social, and governance issues that, if not adequately addressed, jeopardize the financial security of our stakeholders."
Larry Fink: Here’s Your Answer to the Despicable Letter from the GOP Attorneys General - Nell Minow, August 31, 2022
"I’m sure BlackRock CEO Larry Fink’s response to the obnoxious, accusatory, misleading, letter he received from 19 Republican state attorneys general will be measured, diplomatic, and thoroughly lawyered over. He will hope to mollify them to continue to be able to do business with the government pension funds. That is only right for someone who is in business, with employees, clients, and his own shareholders to consider.
I operate under no such restrictions, and therefore, like Keegan-Michael Key playing the part of Luther, President Obama’s anger translator, I have drafted the letter I wish Mr. Fink could send."
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