Stockholm (NordSIP) – Since the end of last year, some reactionary quarters of the USA have begun warning against the dangers of sustainable investing, which they deride as “woke capitalism”, the presumed financial arm of some global left-wing activist take-over. The reaction appears to mainly oppose the efforts of asset managers and regulators to integrate environmental and social factors in the viability assessment of investment opportunities.
The struggle is not abstract, and fund managers have now taken to their annual reports filed with the US Securities and Exchange Commission (SEC) to warn against the danger presented by these conflicting and divergent approaches to ESG. The issue, they argue, is that they have to manage clients and politicians pulling in different directions. While sustainability-minded investors are unwilling to join an asset manager that does not integrate ESG considerations, some are now willing to blacklist those that do.
Investors’ ESG Integration Demands
Blackstone’s 2023 Annual Report takes the trouble of highlighting the reasons the world’s largest private equity (PE) manager has taken to ESG. “We believe that consideration of appropriate (…) [ESG] principles can help us further our mission of delivering strong returns for our investors, and we use our scale and expertise to help strengthen our companies, assets and the communities in which they operate,” Blackstone says.
“We believe that for certain investment strategies, consideration of appropriate ESG factors can help us identify attractive investment opportunities and assess potential risks in furtherance of our mission to deliver strong returns,” Blackstone continues.
“We, our funds and their portfolio companies are subject to increasing scrutiny from regulators, elected officials, stockholders, investors and other stakeholders with respect to environmental, social and governance matters. (…) With respect to the alternative asset management industry, in recent years, certain investors, including public pension funds, have placed increasing importance on the impacts of investments made by the private funds to which they commit capital, including with respect to climate change, among other aspects of ESG,” Blackstone explains.
KKR’s 2023 Annual Report outlines the risk in most detail. “We, our funds and their portfolio companies risk damage to our brands and reputations, if we or they do not, or are perceived to not, act responsibly in a number of areas, such as diversity, equity and inclusion, human rights, climate change and environmental stewardship, support for local communities, corporate governance and transparency, or other environmental- or social-related areas. Adverse incidents in these areas could impact the value of our brand, the brand of our funds or their portfolio companies, or the cost of our or their operations and relationships with investors, all of which could adversely affect our business and results of operations,” KKR adds.
Investor Concerns with ESG
Notwithstanding investor demands for ESG integration, investors are not monolithic. As people and organisations bring their idyiosynchratic beliefs to bear on their investment decisions, different investment preferences emerge, or else asset managers would all offer a single fund for all to invest in.
In the natural course of their professional activity, it is natural for investment managers to address different investment demands. Some investors prefer value stocks, while others prefer growth stocks, for instance. ESG is no exception. Some investors see ESG integration as part of asset managers’ due diligence and obligations, while others worry that it is a distraction from their fiduciary duty to maximise profits.
Elaborating on the appeal of ESG integration, Blackstone’s 2023 Annual Report describes this nuanced reality in detail. “Conversely, certain investors have raised concerns as to whether the incorporation of ESG factors in the investment and portfolio management process may be inconsistent with the fiduciary duty to maximize return for investors,” notes. (…) At times, investors, including public pension funds, have limited participation in certain investment opportunities, such as hydrocarbons, and/or conditioned future capital commitments to certain funds on the basis of such factors. Other investors have voiced concern with respect to asset managers’ policies that may result in such managers subordinating the interests of investors based solely or in part on ESG considerations. We may be subject to competing demands from different investors and other stakeholder groups with divergent views on ESG matters, including the role of ESG in the investment process,” BlackStone says.
“This divergence increases the risk that any action or lack thereof with respect to ESG matters will be perceived negatively by at least some stakeholders and adversely impact our reputation and business. If we do not successfully manage ESG-related expectations across the varied interests of our stakeholders, including existing or potential investors, our ability to access and deploy capital may be adversely impacted. In addition, a failure to successfully manage ESG-related expectations may negatively impact our reputation and erode stakeholder trust,” Blackstone adds.
KKR echoes these concerns. “Different stakeholder groups have divergent views on ESG matters, including in the countries in which KKR operates and invests, as well as in the states and localities where KKR serves public sector clients. This divergence increases the risk that any action or lack thereof with respect to ESG matters will be perceived negatively by at least some stakeholders and adversely impact our reputation and business.”
Concerns About Political Opposition to ESG
The issue that is now at stake is not some novel heterogeneity of investor preferences but rather how this situation and its risks are compounded by adding the weight of polarised political manoeuvring to it.
The new danger is not with shareholders, but rather with the broader audience of stakeholders. In polished corporate language, BlackRock’s 2023 Annual Report echoes this concern with the recent pushback from stakeholders. “Climate-related transition risks arise from exposure to the transition to a lower-carbon economy through policy, regulatory, technology and market changes. For instance, new or divergent climate regulations or guidance, as well as differing perspectives of stakeholders regarding climate impacts, have affected and may continue to affect BlackRock’s business activities and reputation, increase scrutiny and complicate compliance requirements, which could increase the Company’s costs. (…) Different stakeholder groups have divergent views on ESG-related matters, including in the countries in which BlackRock operates and invests, as well as in states and localities where BlackRock serves public sector clients,” BlackRock warns.
KKR’s 2023 Annual Report goes a step further and explicitly warns against the implementation of anti-ESG boycotts and prohibitions. “Anti-ESG sentiment has gained some momentum across the United States, with several states having enacted or proposed ‘anti-ESG’ policies or legislation, or issued related legal opinions. For example, (i) boycott bills in certain states target financial institutions that are perceived as “boycotting” or ‘discriminating against’ companies in certain industries (e.g., energy and mining) and prohibit state entities from doing business with such institutions and/or investing the state’s assets (including pension plan assets) through such institutions; and (ii) ESG investment prohibitions in certain states require that relevant state entities or managers/administrators of state investments make investments based solely on pecuniary factors without consideration of ESG factors. If investors subject to such legislation viewed our funds or ESG practices as being in contradiction of such ‘anti-ESG’ policies, legislation or legal opinions, such investors may not invest in our funds, our ability to maintain the size of our funds could be impaired, and it could negatively affect the price of our common stock. If we do not successfully manage ESG-related expectations across these varied stakeholder interests, it could erode stakeholder trust, impact our reputation, and constrain our investment opportunities. In addition, investors may decide not to commit capital to future fundraises as a result of their assessment of our approach to, and consideration of, ESG matters.”
“In addition [to divergent investor demands], government authorities of certain U.S. states have requested information from and scrutinized certain asset managers with respect to whether such managers have adopted ESG policies that would restrict such asset managers from investing in certain industries or sectors, such as traditional energy. These authorities have indicated that such asset managers may lose opportunities to manage money belonging to these states and their pension funds to the extent the asset managers boycott or take similar actions with respect to certain industries. This may impair our ability to access capital from certain investors, and we may in turn not be able to maintain or increase the size of our funds or raise sufficient capital for new funds, which may adversely impact our revenues,” Blackstone’s 2023 Annual Report warns.
T Rowe Price’s 2023 Annual Report adds its voice to the chorus warning against divergent stakeholder demands.“ESG issues have been the subject of increased by regulators and stakeholders. Any inability to meet applicable requirements or expectations may adversely impact our reputation. Additionally, various stakeholders have divergent views on ESG matters, including in the countries in which we operate and invest, as well as states and localities where we serve public sector clients. These differences increase the risk that any action or lack thereof by us concerning ESG will be perceived negatively by some stakeholders and could adversely impact our reputation and business. Our global presence and investments on behalf of our clients around the world could also lead to heightened scrutiny and criticism in an increasingly fragmented geopolitical landscape.”
Larry Fink was considerably more explicit during a Bloomberg interview at the 2023 World Economic Forum. While noting that the political backlash has not hindered the business given that ESG brought in 400 billion in ESG flows against US$4 billion in withdrawals from some republican-majority US states, he did disparage the state of play. He noted that ESG-integation had been weaponised to personally attack and demonise him as part of an uggly narrative underlying broader political polarisation efforts.
Internalising Anti-ESG Risks
The issue is not going away and asset managers and asset owners should become aware of the impact that volatile American political cycles might have on their investment plans. While Europe moves slowly and in consensual ways, the typically Anglo-Saxon preference for first-past the post (FPTP) electoral systems tends to allow the (plurality) winner of an election unhindered by political customs to completely reshape policy on any given area.
Increasing evidence suggests that should a favourable political majority present itself, politicians would take the opportunity to lean on asset managers’ investment decisions to push their anti-ESG agenda. Should this risk materialise after the 2024 US elections, the SEC’s efforts to push for ESG disclosures would most likely come to a halt and the green investment push underlying the Biden Administration’s US Inflation Reduction Act (IRA) might just be completely reversed. That, too, is an ESG risk investors might want to consider in light of this recent uptick in conservative activism.
