2023 Q2 ESG Market Review

12 July, 2023

The untimely rise of anti-ESG sentiment

Our clients will already know that over the past decade we have seen accelerating momentum around ESG disclosure and commitments. As more funds flew into sustainable investments, it only made sense for regulators to advocate for comprehensive and comparable information around ESG and corporate responsibility. This trend, despite being stronger in Europe, had recently started to pick up in the United States as well, as demonstrated by supportive policies such as Joe Biden’s Inflation Reduction Act.

In financial markets things move fast and all of the above was true until the end of 2021. Since the start of last year, we have witnessed a rise in anti-ESG sentiment on the other side of the pond, challenging the field of ESG investing. Certain U.S. states and lawmakers are expressing their opposition by introducing anti-ESG bills and divesting from ESG-focused funds.

Between 2021 and 2022, 18 U.S. states passed legislation that limits or prohibits ESG investing or restricts state governments from working with financial institutions that adopt specific ESG policies.

Florida is an example of a state that took drastic measures by adopting a proposal last August that prevented its pension fund and investment management partners from considering ESG factors in their decision-making process.

In December 2022, Florida announced a $2 billion withdrawal from the state’s pension funds over ESG concerns – and by concerns here they mean the application, not the lack of screening and exclusions – marking the largest anti-ESG withdrawal by such a jurisdiction. However, a recent “truce” will allow the asset manager to continue overseeing those funds on the condition that ESG strategies are no longer applied. Furthermore, Florida issued guidelines this month that prohibit state-run fund managers from considering ESG issues in their investments.

Other states are following suit. For instance, last January, West Virginia decided to withdraw assets from an investment fund due to concerns about its ESG focus. Additionally, both West Virginia and Texas have enacted laws that blacklist financial institutions involved in fossil fuel divestment and, in the case of Texas, boycott firearms companies.

More recently, a coalition led by Texas filed a lawsuit against the U.S. Department of Labour, seeking to halt a new rule that permits retirement plan fiduciaries to consider ESG factors in pension investment decisions.

Luckily, here in Europe we haven’t witnessed the same level of political divide around such a crucial theme, but it’s easy to imagine the possible results: politicisation will inevitably lead to inconsistent regulations and policies, an issue investors are already struggling with. Loss of credibility is another probable outcome: anti-ESG sentiment could sediment scepticism among investors who see sustainable investing as simple rhetoric or empty virtue signalling.

In this divisive context we plan to maintain our practical approach to ESG investing. As capital allocators we are first and foremost stewards of our clients’ funds and as such we have a mandate to allocate in a responsible and sustainable way, contributing to high quality solutions rather than aggravating problems of our era. Our starting point is an ethical as well as a pragmatic one and our base case is that as policy makers wake up to the reality of a hotter and more unstable climate, companies focusing on solutions and more sustainable practices will be rewarded and enjoy a growth stronger than peers.

Political trends come and go but in our humble and unbiased opinion, advancing ESG objectives requires cooperation, which is essential to develop long-term solutions among division and debates. We hope unconvinced policy makers eventually see this too, before irreversible damage is done.

Tiziana Maida

Head of Research

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.

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