How net zero can win over its critics

Support for the anti-ESG movement in the US has been building in recent months, and net zero has become a key battleground in the culture wars that aim to shape public policy. With Democrats in charge of the White House and Congress, Republicans have begun acting at a state level to try to reverse some of the ESG policies employed on pension funds they oversee.

In August, Florida governor Ron DeSantis banned state pension schemes from “ideological” ESG considerations, prioritising “the financial security of the people of Florida over whimsical notions of a utopian tomorrow”.

“Corporate power has increasingly been utilised to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity,” said DeSantis.

False ESG narratives?

Things escalated further recently when Texas comptroller Glenn Hegar declared that the world’s largest asset manager BlackRock and nine European financial groups deliberately boycotted the fossil fuel industry and decried a lack of transparency over ESG practices.

“The ESG movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” said Hegar.

“My greatest concern is the false narrative that has been created by the environmental crusaders in Washington, DC, and Wall Street, that our economy can completely transition away from fossil fuels when, in fact, they will be part of our everyday life into the foreseeable future.”

In response, BlackRock said it did not boycott fossil fuels and had invested $100bn in Texan energy companies.

“Elected and appointed public officials have a duty to act in the best interests of the people they serve,” it argued. “Politicising state pension funds, restricting access to investments, and impacting the financial returns of retirees, is not consistent with that duty.”

Another asset manager named by Hegar, Swedbank, said climate change was “one of the greatest challenges of our time” and would not provide any new direct financing for oil and gas projects.

UK asset manager Schroders, meanwhile, said it had $19bn allocated to companies in the energy sector globally and was committed to maximising returns to investors through engagement with these companies.

“We help them to navigate and adapt to the opportunities and risks their businesses face amid the energy transition needed to mitigate climate change,” it said. “This process of engagement is driven by data and the deep analysis we undertake to assess and manage potential investment risk.”

Depoliticising ESG

The investment industry faces a key challenge in depoliticising ESG and moving the discussion away from science-based arguments to focus more on the investment returns and tackling financial risks that an ESG approach involves. This may be easier said than done, however.

Traditionally, the oil and gas industry has been a significant contributor to Republican party funding. In 2020, some $63.3m was donated, according to Open Secrets, an independent, non-profit research group, compared with just $12m for Democrats. And while donations from alternative energy production and services companies have overwhelmingly favoured Democrats, the $2.7m donated in 2020 was just a fraction of the oil and gas industry’s lobbying efforts.

To combat some politically motivated attacks on ESG investing, US SIF: The Forum for Sustainable and Responsible Investment, which represents the sustainable investment industry, has launched a website (www.esgtruths.com) to explain why sustainable investing is needed.

“In recent months, the field of sustainable investing has been the focus of politically motivated and simplistic attacks on ‘ESG,’” said Bryan McGannon, director of policy and programmes at US SIF. “For individual investors and investment institutions, considering ESG factors is about investment results, not politics.”

Challenging ‘flat-earthism’ with facts

Sandra Carlisle, head of sustainability at Jupiter Fund Management – which has assets under management of £55.3bn, says it is wrong to believe that asset managers have a mandate to fight climate change.

“As long-term, active investors, our duty to our clients is to invest capital to create positive financial outcomes for them,” she explains. “We consider climate change in our investment process as a risk and return factor where we can add value and avoid loss or impairment.

“In other words, it’s a clear and present investment issue, not an ideology.”

Carlisle says her firm’s fiduciary duty to invest with prudence and care means the team must take a “considered, 360-degree view of what’s happening in the world”, which involves thinking how climate change will impact investments.

She says if criticism of net-zero investing is based on a misunderstanding of climate change as an investment issue and what it means for sectors, industries, companies, and countries, then asset managers must present facts as investment analysis. However, she warns some investors may have different views on how climate change may affect their investments.

“If we stick to the facts that what we are doing is investing in and for a sustainable future – and you can’t invest for the past – it’s not that hard to win over critics,” she adds. “However, if someone truly believes that the world is flat, there’s not a lot any investor can do.”