The ESG backlash in the US has been worrying sustainable investing teams in private markets. At PEI Group’s Responsible Investment Forum in New York this week, which brought together 400 GPs, LPs and specialists, every panel has made mention of the backlash.
Republican states such as Florida, Texas, Idaho, West Virginia and Kansas have introduced legislation banning state pension funds from considering ESG factors, or investing in funds that do. In other cases, state treasurers and investors have dismissed ESG as “bending the free market to political will”. A Senate vote this week blocked a rule allowing retirement plans to take ESG into consideration when investing.
Panellists at the conference – which was held under Chatham House rule – argued that the backlash has been loud, misjudged and misinformed. ESG is simply additional information that helps investors make deployment decisions, said one US LP, adding: “It’s very rare for anyone to say ‘I need less information to think about a decision’. You wouldn’t be a pilot and say, ‘I want to have less information’.”
ESG measures in asset management are aligned with long term value-creation and risk-mitigation, and the associated work and costs are short-term, said one GP. “And we all know what happens to a company when you prioritise short-term profits over the long term,” the GP added.
Gatherings of sustainability professionals can at times feel like an ESG echo chamber. Attendees of a responsible investment conference are already sold on the material importance of sustainability and ESG factors in investments; that’s why they are there.
They are right to be worried about the backlash. Amid tighter fundraising conditions, managers fear that giving attention to sustainability issues will put them at a disadvantage in courting certain LPs. Indeed, large, listed firms are now itemising divergent views on ESG as a material risk factor in SEC filings. “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,” writes KKR in its Form 10k, released this week.
If you believe that the urgency of the climate crisis requires the entire industry to mobilise for the transition quickly, then anti-ESG-related delays are potentially disastrous. And if anti-ESG sentiment turns into laws that restrict investors in their choices, it then it becomes deleterious for pension beneficiaries.
The tug-of-war to define ESG and explain its material relevance to financial returns does no good unless the ESG detractors are in the room. I asked some of the panellists if they had engaged with any detractors on defining and explaining ESG. Each said no. “That’s not really my job,” said one. “I don’t think they’d really want to hear from me,” said another. “I try not to get involved in fundraising anymore,” said an ESG head at a fund manager.
Sustainable investing specialists have a collaborative spirit that is unique in private markets: for years, rival firms and investors have joined forces to form associations and develop frameworks and guidance. Perhaps it is time that that this collective spirit is harnessed to take the case for ESG in investment decision-making direct to its detractors.