‘Divergent views’: US managers highlight material ESG backlash risk

A number of large US-listed GPs have highlighted the risk to their financial performance posed by the ongoing backlash in several US states against the inclusion of ESG factors in investment decisions.

The SEC requires listed companies to file an annual Form 10K detailing their financial performance and risk factors to their businesses. The fact that so many managers have included anti-ESG sentiment shows the threat it is deemed to pose to financial performance.

In its report, Blackstone said it “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”. It added that: “Investors, including public pension funds, which represent a significant portion of our funds’ investor bases, may decide to withdraw previously committed capital (where such withdrawal is permitted) or not commit capital to future fundraises based on their assessment of how we approach and consider the ESG cost of investments and whether the return-driven objectives of our funds align with their ESG priorities.”

KKR highlighted that “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”. It added that “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”.

TPG and Ares used near identical wording, noting that “anti-ESG sentiment has gained momentum” across the US, “with several states having enacted or proposed ‘anti-ESG’ policies, legislation or issued related legal opinions”.

Their assessments identified  “boycott bills” that “target financial institutions that ‘boycott’ or ‘discriminate against’ companies in certain industries and prohibit state entities from doing business with such institutions and/or investing the state’s assets (including pension plan assets) through such institutions”. The law passed in West Virginia last year that pushed back against “unfair discrimination” against fossil fuels, is an example of a boycott bill.

The pair also drew attention to “ESG investment prohibitions”, which “require that state entities or managers/administrators of state investments make investments based solely on pecuniary factors without consideration of ESG factors”. Both concluded that LPs “may not invest in our funds” if they are deemed to be opposed to anti-ESG policies.

Apollo was an outlier in not making any substantial reference to the issue in its filing. The New York-based firm merely said that “investors may decide not to commit capital in fundraises, or to withdraw previously committed capital from the funds we manage, based on their evolving ESG priorities”.