Should Politicians Decide How People's Assets Are Invested?
In the hyper-politicized battle over ESG (Environmental, Social and Governance) investing, asset management firms are being demonized for sponsoring socially responsible, values based, ESG and impact investment strategies. For example, the Republican Attorney General of Arizona, Mark Brnovich, wrote recently in The Wall Street Journal that "[woke] asset managers... have joined with left-wing state pension funds to cram environmental, social and governance policies down the throats of American companies and employees..."
This summer, Texas Comptroller Glen Hegar published a "blacklist" of 10 financial firms and 350 open-end mutual funds and ETFs sponsored by other managers, charging they are part of "a perverse system in which some financial companies no longer focus on the best interests of their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy."
Indiana's Attorney General Todd Rokita issued an advisory opinion stating that investments by the Indiana Public Retirement System (INPRS) "may not, under state law, be based upon any so-called environmental, social and governance (ESG) considerations. These are activist-driven agendas intended to achieve radical environmental and social policies."
"America is now a minefield for financial companies when it comes to ESG," writes Gillian Tett in the Financial Times.
Advocates of ESG investing (most recently in a letter signed by 13 state treasurers and New York City's comptroller) counter that they are merely fulfilling their fiduciary responsibility to consider all factors, not merely financial metrics, in evaluating which investments to make for the purpose of maximizing long term returns and minimizing risk; and that doing so has resulted in "long term positive outcomes." But they are missing the opportunity to make an even more fundamental point – namely, that most asset managers are offering socially responsible investment strategies because that is what a growing percentage of their clients have been demanding for years. Global inflows to sustainable funds increased from $30 billion in 2016 to $360 billion in 2020. While interest in sustainable investing in the U.S. has trailed other nations, particularly in Europe, assets under management in U.S. listed ESG ETFs grew from nearly $83 billion to more than $144 billion in 2021. Despite the turbulent market environment in 2022, which saw many investors retreat to more familiar large cap U.S. equities (traditional energy stocks have seen notable gains as gas prices have risen), sustainable funds still attracted a net $9 billion in inflows during the first six months of the year.
By where they move their money, asset owners (the ultimate providers of capital) including sovereign wealth funds, corporate and public pension funds, foundations, endowments and individuals are signaling they want investment processes that consider ESG factors when evaluating risk and assessing return. Or investment strategies targeting specific ESG outcomes. Or both.
Unlike banks, traditional asset management firms are not principals. They are generally not committing capital off their balance sheets. They are instead agents for those who control capital. And one of the foundational roles they play as agents is, and should be, to facilitate the deployment of capital based on asset owner preferences. "Anti-ESG crusaders," as Michael Bloomberg recently fired back, "are attempting to use government to block private firms from acting in the best interests of their clients."
Writes Gillian Tett in the Financial Times, "...politicians do not need to ban ESG ideas to express dislike for them; they can simply choose not to use them."