The ESG Battle Royale

With all the political attention on environmental, social and governance (ESG) investing these days, it’s hard to know who to believe and difficult to project where the industry might go from here. But the fact is, this isn’t a new phenomenon. There have always been investors avoiding sin stocks (e.g., tobacco, alcohol, guns), but socially responsible investing (SRI) made real headway in the 1980s and 1990s. A mini-movement was born encouraging not only the exclusion of sin stocks, but a closer look at which companies to include that are making a positive difference in the world. Calvert and a few other asset managers made some headway, and then …

… ding, ding, ding! Round 1 of the boxing match began.

To counter SRI’s do-gooder claims, the term “greenwashing” was coined. Greenwashing refers to deceptively marketing something as environmentally friendly that is not. The other half of the one-two punch were claims that SRI wasn’t fulfilling fiduciary responsibility when it failed to perform as well as non-SRI. Ultimately, the backlash was too much—it beat SRI back down, and SRI failed to truly launch mainstream.

Down for the count though? Not exactly. SRI remained a novelty until it reinvented itself as Environmental, Social, Governance (ESG) investing in the mid-2000s. This approach aligned itself with the many ongoing social movements related to a company’s use of natural resources (e.g., imports from Russia), how they treat workers throughout their supply chain (e.g., diversity and inclusion (D&I), COVID-19 spotlight on the workforce), and the safety and usefulness of their products (e.g., viral social media callouts).

Just as before with SRI, the backlash has now arrived in full force with … ding, ding, ding! Round 2:

The punches being thrown pro-ESG:

• Issues, like climate and social equity are a vital part of advocating for people’s best interests.
• The movement is mainstream and may be too big to stop.
  • Bloomberg Intelligence says that ESG will exceed $40 trillion worth of assets this year.
  • Cogent Syndicated research tells us that the majority of consultants, OCIO search firms and institutional investors are gathering ESG criteria in RFP searches. Very few have an explicit ESG mandate yet, but ESG and D&I metrics are factored into decision-making.
  • McKinsey & Company estimates that more than 90% of S&P 500 companies now publish ESG reports.
  • There are daily headlines about big asset managers acquiring smaller ESG firms (e.g., MetLife Investment Management acquiring Affirmative Investment Management) and/or appointing heads of ESG/sustainable research.
• Advisors and asset managers are better armed to fulfill ESG requests, which was not the case in the days of SRI. Cogent Syndicated finds that most advisors and “most [asset] managers now have some sort of ESG protocol in the investment process” that can be used with clients who are interested.
• Many entities are actively working on how ESG should be measured. And that effort is only getting easier as Europe starts requiring companies to report on their environmental and societal impact, and the US Securities and Exchange Commission is asking companies to report their greenhouse gas emissions.
• There is a generational shift happening, with younger generations of investors being more progressive and claiming to be more interested in ESG, according to Cogent Syndicated.

The punches being thrown anti-ESG:

• There remains no universal standard yet (i.e., set metrics or a rating agency) by which companies are judged on ESG criteria or impact.
• Multiple state legislatures (e.g., Texas, West Virginia, Indiana and others where fossil fuels are key to the local economy) are enacting laws to prohibit their state pensions from investing in ESG.
• Cogent Syndicated research highlights that consultants and advisors are increasingly concerned that ESG is highly political. As one consultant put it: “The law has been flip-flopping back and forth. … During the prior administration [Trump], the door was closing on it, and then the current administration [Biden], the doors are open on it again. … Plan sponsors on the retirement side are worried that if they add it now, [then] during the next administration, will they have to take it out?”
• Greenwashing and fiduciary responsibility arguments are finding new life. Cogent Syndicated research tells us there’s growing skepticism over the ability of asset managers to generate competitive returns while employing ESG strategies.
• Counter-ESG strategies are emerging. For example, Strive Asset Management recently launched its first ETF (DRLL) that plans to use its proxy voting power to push a non-ESG agenda on corporations—raising more than $100 million in its first week.
• Finally, some in the industry are simply waiting this all out, surmising that the ESG issues may resolve themselves. Many companies are changing their business practices to the extent that an ESG rating will not be necessary. One consultant told Cogent that “someday in the future, this is all just going to get blended into the normal course of security analysis business.”

The battle royale is raging right now, and it’s starting to look like ESG is in for another beatdown. Cogent Syndicated will continue to keep a pulse on all the industry dynamics and influencers, offering key insights for asset managers as they seek to optimize their strategies for the future. Want to know more?