Responsible Investing – or investing with Environmental, Social, and Governance (ESG) considerations – is well past its trendy phase and is settling in as a financial norm. According to a 2021 study by Ernst & Young, the vast majority (90%) of global institutional investors consider ESG issues in their investment process. Yet despite global integration, ESG investing has become a political battlefield in the United States, with the Republican Party leading the charge against investors.
We’ve written about ESG before! Check out these articles for more background on the topic: – A guide to Green Finance (2020) – Put your money where your morals are with ESG investing (2020) – Fintech and Responsible Investing (2021) – Is Your Pension Funding Climate Chaos? (2022) – Business with a Social Purpose – what’s dat? (2023) |
ESG investing is good risk management for investors because non-financial factors have financial impacts. And no good can come from the politicization of a method to reduce long-term risk in the investment process, or which has finance professionals concerned with steering an investment strategy through a political battlefield.
Why Don’t Republicans Like ESG?
The backlash against ESG has been creeping from the Republican Party for a while now, but it really kicked off with Larry Fink’s annual Letter to CEOs in 2021. Fink – Chairman and CEO of Blackrock, the world’s largest asset management firm (USD$10 trillion AUM) – had the audacity to mention climate change. Specifically, the idea that climate risk presents as investment risk. He then went on to encourage companies to deliver long-term value for all stakeholders (not just its shareholders). The idea is that high stakeholder value begets high shareholder value.
Since then, ESG investing has been synonymous with “woke capitalism” and painted by conservatives as a liberal strategy used to promote political agendas and overlook the traditional interests of businesses and markets. Former Vice President, Mike Pence, summed up the Republican viewpoint in a scathing commentary in the Wall Street Journal:
“ESG empowers an unelected cabal of bureaucrats, regulators and activist investors to rate companies based on their adherence to left-wing values…ESG investing weaponizes the financial system to shut down economic growth in the energy industry in the name of environmental extremism.”
Since that article, high profile conservatives have spoken out against ESG investing and many Republican-majority States have forbidden ESG investing in public pension funds.
The Republican crusade against ESG investing recently culminated with President Joe Biden’s first veto – where he blocked congressional legislation thus ensuring asset managers can consider ESG issues in investment decision-making. The veto won’t be the end of the argument – if anything, the aim of legislation was to ensure ESG investing becomes a key issue for the 2024 presidential campaign.
ESG Investing is Risk Management
Similar to their reasoning in denying anthropogenic climate change – the American Republican Party has decided to ignore consensus (be it scientific or financial) alongside common-sense principles in favour of pushing a false narrative.
Let’s zoom in on the header of this section. ESG investing is risk management. What does that mean?
At the bare minimum, when integrating ESG into the investment process, investors factor in company-specific environmental, social, and governance risks and opportunities. These risks and opportunities are considered material per a company’s industry and specific to its operations, geographical location, and to what extent it relies upon natural and human capital to conduct its business.
For Example, let’s consider the company Uber Technologies, which provides the highly popular ride-sharing service. Classified as an internet services or consumer services company, the company is materially exposed to environmental, social capital, human capital, and governance risks. These ESG risks present a potential financial threat to the company and could impact share price and thus investor return.
FYI, you can search for any companies’ material ESG risks via the SASB materiality Finder – a global standard for ESG.
Thinking about Uber’s Human Capital Risks – we want to consider (per SASB) how the Company is fostering a good workforce culture, promoting diversity and inclusivity, and preventing discriminatory practices. Uber is already facing the consequences of lacklustre human capital management practices with several allegations that it violates the labour rights of its drivers and ongoing lawsuits on the misclassification of its drivers. There is an entire Wikipedia page dedicated to the company’s controversies. The company is working to address these controversies, but the risk is there all the same.
All Together Now
ESG investing is risk management. When considering buying shares of Uber, ESG investors would factor in the above risks into their investment process. Does this mean the company is overvalued? Should we wait to buy? All questions asked in the traditional investment approach, but which are applied to non-financial factors. Because non-financial factors have financial impacts.
There are many other ways an investor can integrate ESG into a strategy – but now is not the time to provide those details. The point being made, and that Republicans have pointedly (and possibly deliberately) failed to grasp, is that ESG investing is risk management.
Now, ESG investing has many ways it can be improved. The quality of available ESG data, the standardisation (or lack thereof) of corporate ESG reporting, the confusion around ESG fund labels – are a few areas where regulation could (and is!) step in to support investors. However, evaluating if a company considers the risks posed by climate change, or the unionisation of its workers, or if it’s excessively paying its executives is not an adherence to left-wing values – it’s common sense risk management.
Be Curious
- Be professional! Want to learn more and gain ESG credentials? Look at the SASB Certification or the CFA Institutes Certificate in ESG Investing.
- Ask your investment managers how they apply ESG factors to their investment process. Look at investment documentation and fund holdings to be even more due-diligent. You’ve always got a say in how your money is invested!
- Read Up! You can always learn more about how Climate risks impact our economy.
- The Climate Book: the Facts and the Solutions by Greta Thunberg
- Sustainability Is the New Advantage: Leadership, Change, and the Future of Business by Peter McAteer
- How to Avoid a Climate Disaster: The Solutions We Have and The Breakthroughs We Need by Bill Gates
