You may have noticed that there has been a barrage of criticism lately targeting ESG investing. In this commentary, we respectfully take aim at what we consider to be two of the most prominent anti-ESG talking points. Long story short, we don’t believe they really have any merit.
They Say: “It's just lefty/liberal/"woke" investing”
We Say: Data supports the view that environmental, social, and governance criteria are material to company performance. As a result, ESG is about risk mitigation and serves as a way to incorporate additional, material information about risks that have not traditionally been considered. Investors, of course, are free to incorporate their own ethical framework into investment decisions, but that’s not at the root of the ESG methodology.
Let’s look at a concrete example of why ESG risks should be on the radar of investors. Currently, two of the largest states in the U.S. (California and New York) are considering legislation that would punish fossil fuel companies for their contribution to climate change. California’s bill would require the state’s pension funds to start divesting from these businesses by 2024. Meanwhile, the New York legislation would impose a levy on the order of $30 billion over a decade on the worst polluters in the state.
Whatever one thinks about the ethics of owning a coal or oil and gas stock, it just can’t be said that the financial and investment implications of New York and California’s proposed actions aren’t material.
They Say: The Term ESG Has Become So Watered Down That It’s Now Meaningless
We Say: We agree that greenwashing is a problem in the industry. In fact, we even wrote [link] about the problem a few years ago, noting that two of the largest institutional investors with ESG funds had been voting against climate-change friendly shareholder resolutions.
Fortunately, the SEC is working to develop regulatory frameworks that should help - including improving disclosure at both the corporate and fund level and defining what is required to make a claim of ESG in a fund's name. Just because some people are misusing a term does not mean that the work it was intended to describe is the wrong work or should stop.
While many investment companies are no doubt using the ESG label to attract assets, we’re confident that investors who are paying attention will gravitate towards the real deal. As we argued in our piece on greenwashing:
…many investors are disheartened by and wish to avoid those asset managers that use the ESG label as little more than a pretext for higher fees. This analysis suggests that managers with an expressed and demonstrated commitment to ESG are more likely to meet the expectations of those investors.
If the rules are tightened up by the SEC, we’re hopeful that greenwashing will dissipate. And we’re confident that ESG-guided investing will remain, and grow ever-stronger as even more investors recognize its benefits.
1 Bills in blue states target the fossil fuel industry for climate damage, The Washington Post, May 31, 2022.
2 SEC ESG-Rulemaking Wave Continues with Proposed Rule for Advisers and Funds, Holland and Knight LLP, June 28, 2022.