Grygo is the chief content officer for FTF & FTF News.
Call it a fight over conflicting ideological screening methods or a backlash against a backlash. But, regardless of the initial label, a major political battle over environmental, social, and governance (ESG) principles is gathering steam.
As conservative U.S. states fall in line against the usage of ESG principles for public pension investments, 13 state treasurers and the comptroller for New York City are taking a stand against what they perceive to be a campaign to blacklist financial services firms that embrace ESG efforts. (See our coverage of the 24 states that are part of the anti-ESG backlash here: https://bit.ly/3xsXvg4 )
The treasurers from such places as Maine, Nevada, Delaware, and New Mexico, and the NYC comptroller are members of the Long-Term, which published the letter. The 501(c)(3) public charity “supports state, city, county, and tribal Treasurers in managing the unique challenges they have in interfacing with each other and nonprofit organizations to support the long-term well-being of their beneficiaries.”
The letter, entitled “We are in it for the long term (9/14/2022),” takes aim at West Virginia, Idaho, Oklahoma, Texas, and Florida for creating “new policies and laws that restrict who they will do business with, reducing competition and restricting access to many high quality managers. This strategy has real costs that ultimately impact their taxpayers.”
These states and others — which harbor industries and communities threatened by ESG — are part of an anti-ESG effort that wants public pension funds to never be restricted by ESG policies that could sink investment returns and undercut fiduciary responsibilities. (See our story running today.)
“These blacklists are a backlash response on behalf of political and corporate interests seeking to interfere with the progress made by those of us who believe in collaboration and engagement. We work towards developing common goals, along with other investors and enlightened companies throughout the world. Our joint efforts have resulted in increased corporate responsibility, transparency, disclosure, and long term positive outcomes for the funds that we oversee, with greater benefits to employees and customers alike,” according to the letter.
“The blacklisting states apparently believe, despite ample evidence and scientific consensus to the contrary, that poor working conditions, unfair compensation, discrimination and harassment, and even poor governance practices do not represent material threats to the companies in which they invest,” according to the letter. “They refuse to acknowledge, in the face of sweltering heat, floods, tornadoes, snowstorms and other extreme weather, that climate change is real and is a true business threat to all of us. We disagree.”
The anti-ESG push could add to the divisions already underway in the U.S., according to the treasurers’ letter.
“The evolving divide suggests that there will be two kinds of states moving forward: states focused on short term gains and states focused on long term beneficial outcomes for all stakeholders,” according to the letter.
Those who signed the letter say that the anti-ESG effort “imposes an ideological screen on an investment manager’s ability to perform or whether an investment banker can compete for the opportunity to underwrite debt. This screen negatively impacts competitive costs, and increases potential risks that will be left for others to deal with in the future. In the case of state and public pension funds, these losses will be borne by the taxpayers and that means all of us.”
The letter touches on the energy sector and notes that many organizations acknowledge the climate change problem and “are already working toward reducing their carbon footprint, while the automobile manufacturers have begun rapid movement to electric vehicles. Engaged investors are working with the fossil fuel companies to help them effectively manage the energy transition, supporting their efforts to seize new opportunities in renewable energies. Doing otherwise would be a huge risk to them and their investors.”
The letter also has a warning for the anti-ESG crowd.
“States that focus solely on the short term will fail to compete over the longer time horizon that is necessary for them and their pension funds to succeed,” according to the letter. “They will miss potential growth because their focus is on preserving the status quo. And they will suffer from possible suits or challenges that longer term players will avoid due to more rigorous oversight.”
Regardless of the next steps, this brouhaha will have direct impacts upon financial services firms and their investment and legal interactions with public pension funds in the anti-ESG states.
The bigger question is whether the ESG battle grows beyond the public pension funding arena. Once that Rubicon is crossed, the ESG war could have multiple impacts upon compliance teams, portfolio managers, performance measurement staffs, client reporting teams, and a variety of groups within securities operations.
Ultimately, though, many firms will find out if they can serve two masters who represent diametrically opposite investment philosophies.
In the meantime, the signatories to the letter are:
Henry E. M. Beck, Maine State Treasurer
Zach Conine, Nevada State Treasurer
Colleen C. Davis, Delaware State Treasurer
Tim Eichenberg, New Mexico State Treasurer
Michael W. Frerichs, Illinois State Treasurer
Sarah A. Godlewski, Wisconsin State Treasurer
Deborah B. Goldberg, Massachusetts State Treasurer and Receiver General
Brad Lander, New York City Comptroller
Fiona Ma, California State Treasurer
Seth Magaziner, Rhode Island General Treasurer
Beth Pearce, Vermont State Treasurer
Michael J. Pellicciotti, Washington State Treasurer
Tobias Read, Oregon State Treasurer
David L. Young, Colorado State Treasurer
The full letter can be found here: https://bit.ly/3LkhcfY
Need a Reprint?