Several state legislatures have recently begun punishing investment companies that take environmental, social, and governance (ESG) data into consideration when making investment decisions.
Elon Musk tweeted, “ESG is a scam. It has been weaponized by phony social justice warriors.” In an opinion piece in The Wall Street Journal, former Vice President Mike Pence says that investing using ESG principles is politically driven and is part of a plan by the “woke left” to conquer corporate America.
While all of this may be great rhetoric to motivate a political base, along with the boogeymen of CRT (Critical Race Theory) and DEI (Diversity, Equity, and Inclusion), the question is, what is the ultimate goal of this fight and who does it benefit?
In the case of the state legislatures, most are from states where fossil fuels are a major contributor to their local economies. It makes sense that they’re trying to protect jobs and tax revenues. However, if they truly are motivated by a sense of duty to their constituents, wouldn’t they take the time to see the writing on the wall when it comes to fossil fuels? All the major automobile manufacturers are transitioning their fleets from internal combustion engines (ICE) to battery electric. Most major utilities are phasing out their coal plants and making massive investments in solar, wind, and storage. It would make sense, instead of protecting a dying industry, that they instead focus on job retraining programs and incentives to bring new economy companies to their states.
And what about risk? Most investment managers act as fiduciaries, and a major part of this responsibility is balancing risk and return. ESG metrics that are based on hard data only help the investment manager understand a company or municipality’s risk and operational situation better. This is in line with their fiduciary duty.
Government officials in Utah, for example, are upset that S&P rated the state’s environmental risk as moderately negative. S&P’s reasoning is because of “long-term challenges regarding water supply, which could remain a constraint for its economy.” If one is going to invest in Utah municipal bonds, isn’t it important to understand all the risks associated with the investment? The west has major drought issues related to climate change, and S&P is completely within its right to adjust the state’s investment risk as a result. And investment managers fulfill their fiduciary duty by accepting and integrating this information into their investment analysis.
Now, this doesn’t mean that ESG investing doesn’t have its flaws. Blackrock continues to market its “ESG Aware” fund despite owning non-aware companies such as ExxonMobil XOM +0.6%, McDonalds, and Raytheon, and the industry does deserve criticism because of this “less bad” philosophy of investing. It also mistakenly equates ESG investing with sustainable investing when they are not the same thing.
But these politicians don’t care about the difference between ESG and sustainable investing. They are focused on what they consider to be a “woke” form of investing. Simply put, ESG investing is not woke investing – it is expanded due diligence investing. The process helps investment advisors meet their fiduciary duty to clients by looking at all the factors that affect a company’s performance – not just traditional fundamentals. It looks at systemic risks, including climate change, resource scarcity, and inequality, and does two things: eliminates companies with greater risk and includes companies focused on solutions for those systemic risks. This may make those who aren’t evolving with the new economy nervous, such as fossil fuel companies and the politicians who support them, but it is where the economy and markets are going. Ignore it at your own peril.
Originally published in Forbes.
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