While there is a backlash in the U.S., ESG is flourishing in Europe.
Grygo is the chief content officer for FTF & FTF News.
It’s amazing how quickly pendulums swing in the U.S. Not that long ago, there was a lot of positive talk about investments based upon environmental, social, and governance (ESG) and sustainability factors. To say the least, that has changed dramatically.
For instance, the Securities and Exchange Commission (SEC), now under the control of President Trump’s appointees, is maneuvering to put an end to a highly controversial Biden-era rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” that has many requirements for climate-related risk reporting. As our story this week notes, the legal step that the SEC is taking might ultimately kill the rule via the court system. If not, I suspect the SEC will rescind the rule via its current Administrative Procedure Act (APA) process.
So, it should come as no surprise that Trump and his team are no advocates of climate-related regulation and policies. Nor are they in support of investments (and thus operations) based upon ESG factors. Given that scenario, I think it’s fair to ask if ESG-based investing is on the ropes in the U.S. I recently got the chance to ask Alan Johnson that question. He is the managing director of Johnson Associates, a provider of compensation consulting services for Wall Street firms. (Check out our Q&A with him here.)
So, basically, is ESG dead in the United States?
“It’s teetering, certainly in the United States. Of course, it’s alive and well in Europe. It’s a huge deal and remains a huge deal in Europe,” Johnson says. “So, if you’re a global organization, you can’t really talk about it here — you can’t talk about DEI [Diversity, Equity, and Inclusion] or ESG. Of course, in Europe, you must talk about it. It’s required. You have to be somewhat schizophrenic depending on what geography you’re in.”
One of the reasons that ESG is thriving in Europe is that four years ago, the European Commission (EC) launched the Sustainable Finance Disclosure Regulation (SFDR), which is a transparency framework that compels firms to disclose what they are doing as far as their ESG efforts.
“By setting out how financial market participants have to disclose sustainability information, it helps those investors who seek to put their money into companies and projects supporting sustainability objectives to make informed choices. The SFDR is also designed to allow investors to properly assess how sustainability risks are integrated in the investment decision process,” according to EC officials.
“In this way, the SFDR contributes to one of the EU’s big political objectives: attracting private funding to help Europe make the shift to a net-zero economy,” EC officials say. “The European Commission is currently carrying out a comprehensive assessment of the framework, looking at issues such as legal certainty, usability, and how the regulation can play its part in tackling green-washing.”
Yet, while there is an anti-ESG backlash underway in the U.S., aren’t a lot of the young folks on the investment banking side, when they inherit the money from their parents, going to want ESG-oriented investments?
“Well, I think at least in the United States, it’s not as big as people thought,” Johnson says. “I think the academics will tell you that whether an individual buys Exxon stock or not, whether he wants to send a message, really has no impact on Exxon stock. There are enough people to buy Exxon regardless of what you think of their environmental records.”
Johnson notes that individuals of all ages can make a statement at a college and/or at the institutional level. For the moment, it’s not clear that enough individuals are expressing their concerns via ESG-based efforts.
“They buy the S&P 500, which is made up of a lot of oil companies. They buy index funds that are made up of all of these things. So I think the talk has been more significant than the reality,” Johnson says. “We have clients who have products that only invest in certain things for sure. At least in the United States, it has not been a real draw. Of course, you don’t want to be named on someone’s list as being overly woke or ESG friendly. That can hurt your whole business.”
And that is why most firms pick their pendulums carefully, if at all.
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