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Everything You Need to Know About ESG Investing And the Backlash to It

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The strategy known as ESG investing has advanced by leaps and bounds – and landed in hot water. His focus on environmental factors, social issues and corporate governance issues has always appealed to people attracted to progressive causes. But in the US, this association with liberalism has sparked a backlash from Republican Party politicians, with efforts underway in some 20 states to curb ESG. At the same time, states led by Democratic Party officials have pushed in the other direction, joined by activists who are quick to speak out against anything they see as a rollback of ESG.

It’s a particular thread in the broader field known as sustainable investing. The initial concept was that the use of ESG criteria would help protect investments by avoiding significant financial risks related to factors such as climate change, labor disputes, human rights issues in supply chains. procurement and poor corporate governance and resulting litigation. But over time and as the field has grown – according to Bloomberg Intelligence, global ESG assets are around $35 trillion – the label has come to be slapped on not just funds that invest in things like renewable energy stocks, but also on funds that track the benchmark. indices containing oil companies or assets in autocratic countries like Russia.

2. What is the backlash against ESG?

Many Republican officials mock Wall Street’s ESG policies as “woke,” turning a progressive term coined to raise awareness of the role of racism in society into a slur bordering on “political correctness.” When Donald Trump was president, the Department of Labor issued a rule that managers with fiduciary responsibility for retirement funds should not base their decisions on other monetary considerations, a step that is reversed under President Joe Biden. But most of the action has come at the state level, where Republican-controlled governments have banned state pension funds from using ESG criteria or investing or doing business with entities they consider like boycotting fossil fuels or arms manufacturers.

• In announcing investment restrictions, Florida Governor Ron DeSantis said Wall Street firms were trying to “implement policies through the boardroom that Floridians reject at the ballot box” .

• In October, 19 state attorneys general announced an investigation into the six largest U.S. banks for joining a United Nations coalition whose members pledge to align their funding with net-zero emissions goals, saying that they could violate consumer protection laws.

• Republican-led Missouri and Louisiana withdrew more than $1.3 billion in public funds from BlackRock Inc., the world’s largest asset manager and Wall Street’s biggest ESG champion.

• It is also likely that there will be ESG hearings on Capitol Hill. Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, said the panel plans to investigate the matter in 2023 if his party wins control of the House in the 2022 midterm elections.

3. How have ESG funds responded?

Some have criticized the Republican measures as anti-free market, saying they amount to preventing funds from pursuing investors’ economic preferences because of conservative political support for oil and gas. Using ESG factors, they say, actually helps them fulfill their fiduciary duties. A study co-authored by a Federal Reserve economist concluded that a 2021 Texas law barring the state from doing business with banks it sees as boycotting oil and gas companies will increase its borrowing costs by hundreds of millions of dollars. BlackRock has defended its policies, arguing that “taking a forward-looking stance” generates better long-term returns. At the same time, he pointed to the fact that he is one of the largest energy investors in the world, with more than $100 billion in Texas ventures and is the second largest shareholder of Exxon Mobil Corp. with a participation of more than 6%.

4. What pressures does ESG face from progressives?

In a sign of the political heaviness of the subject, BlackRock’s attempt to blunt Republican attacks has led New York City Comptroller Brad Lander, a Democrat, to say he was “reassessing” the city’s business with the ‘company. Some progressives believe the term ESG has become so broad that it loses much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions. Even the man who coined the acronym, Paul Clements-Hunt, who now runs an advisory firm called Blended Capital Group, says the finance industry has sprinkled ‘ESG fairy dust’ on products that don’t deserve not the label. Accusations of greenwashing have led to tougher stances by regulators in the US, UK and EU, where funds will now have to label themselves as ‘dark’ green, if ESG is l objective of the fund, or “light” green, if ESG is simply “promoted”. Amidst all these cross-currents, investors may be voting with their feet, if a sharp drop in the number of new ESG funds being rolled out is any indication.

5. What do ESG returns look like?

Global ESG exchange-traded funds are slightly outperforming benchmarks this year, according to data from Bloomberg. About 56% of U.S. sustainable funds beat rival category groups in the three years ending September, according to Morningstar Inc.

• Bloomberg QuickTakes on Sustainable Investing, Ethical Debt, ESG Ratings, the “S” in ESG, Biodiversity and ESG Management.

• A Bloomberg story on how ESG is everywhere in capital markets.

• A Businessweek story on investing in ESG ETFs.

• The Freshfields report which launched the ESG strategy

• A Bloomberg survey of the ESG ratings industry.

• A history of ESG investing by Morningstar.

–With help from Ari Natter.

More stories like this are available at bloomberg.com

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