In recent years, it’s become commonplace for extra scrutiny to be given to the impact that fund managers make through their investment practices.
Environmental, social and governance (ESG) factors are being looked at closely, with those supplying the funds being held accountable for the industries and firms they invest in.
Yet, recent news trickling out of the US show that there remains a long way to go before a consensus is reached on these issues that receive world-wide recognition.
During February, the news came that the Governor of Florida, Ron DeSantis, proposed new legislation that would prohibit fund managers for state and local entities in the Sunshine State to consider ESG factors in any investment decisions – while government entities would also not be allowed to request ESG information from suppliers in the procurement process.
The argument from the Governor is a simple, albeit, inflammatory one. He argues that, “by applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda. Through this legislation, we will protect the investments of Floridians and the ability of Floridians to participate in the economy.”
The disillusionment in the ideology is not restricted to the East Coast of America either, when – in August last year – the attorneys general of 19 states, including Texas, Georgia, Arizona, Utah, and Ohio, sent a strongly worded letter to Larry Fink, CEO of BlackRock – the world’s largest money manager and a high-profile proponent of sustainable investing – attacking the firm’s reliance on ESG criteria in managing state pension funds.
So do they have a point?
The war in Ukraine has proven to be an unfortunate example of profits soaring off the back of conflict alongside rising energy prices from companies involved with gas and oil in particular. That spike in energy prices has, in turn, seen an explosion in the profit margins for energy companies and their investors.
Earlier this year it was reported that oil and gas giant Shell has recorded annual profits of $39.9bn (£32.2bn) after energy prices surged last year following Russia's invasion of Ukraine: double the previous year's total and the highest in its 115-year history.
Eye-watering figures like this give oxygen to the anti-ESG approach as those who have not fully adopted an ESG-conscious approach to investing in gas and oil are most likely to have seen a significant increase in the value of their investments.
Could this influence ESG investment approaches elsewhere in the world?
With parts of America knocking at the door hoping they can be given the freedom to invest where the best returns lie, the rest of the world will have an eye on whether or not they get to fit through the gap they are trying to create.
No matter the outcome, the story in Europe – as an example – will most likely be different.
In a bid to help curb the surge, in September last year, European energy ministers agreed on a package of emergency measures. The package includes two measures to capture extraordinary profits from energy and fossil fuel companies.
This package would include a “temporary solidarity contribution” on fossil fuel companies to recoup one-third (33 percent) of excess profits made in 2022 and/or 2023 as well as a price cap on revenue made by non-gas energy companies (wind, solar, nuclear, etc).
In addition to this, since 2 August 2022, anyone in the EU offering investment advice or discretionary management services must consider any sustainability preferences their clients may have as part of their suitability assessment, under changes to MiFID II and the Insurance Distribution Directive (IDD). The European ESG Templates (EET) was created by the industry group FinDatEx to enable fund and product providers to supply information on the ESG credentials of their products.
The changes to MiFID II and the IDD state that meeting a client’s sustainability preferences requires a fund to have an agreed minimum proportion invested in environmentally sustainable investments. This is defined by either the Taxonomy Regulation or the Sustainable Finance Disclosure Regulation (SFDR), or it must consider principal adverse impacts on sustainability factors.
In summary
One point to consider in the whole discussion is the conversation about differences in our industry. When talking about ESG – just in general – it is unclear if this means corporates’ resilience to environmental changes or if we are discussing the sustainability effects this company has on the world around it.
In general, it is an interesting situation in America where a Governor is pushing forward with these thoughts while on the other side the US Government launched the Inflation Reduction Act 2022. The key points of this Inflation Reduction Act are to boost clean energy and reduce healthcare costs; two central points of potential sustainability strategies and strong indicators for growth areas – hence investment opportunities.
What does remain clear, is that the call for ESG-conscious investing is not going away. That is despite calls from certain circles for it to do so. It therefore remains vital that we continue to innovate and provide solutions that give the likes of fund managers and financial advisers the information they need to make informed decisions that not only maximise returns, but also provide benefits felt by the wider world.
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Dr. Matthias Breier
Head of ESG Product
FE fundinfo