June 15, 2023

For those of us who have been active in the ESG space for many years, it was stunning to see ‘ESG’ referenced negatively in the announcement of a presidential bid. Despite the technologically bungled Twitter live stream launch to his campaign, Florida Governor Ron DeSantis said: “I think this whole ESG movement is really trying to do through the financial sector what they could never achieve through the ballot box… We will not be a free society if major financial institutions can do through the economy what people could not achieve through the ballot box.”

The ‘anti-woke’ Republican candidates aren’t speaking about ESG from a place of personal conviction, but instead have learned from focus groups and survey data that ESG is a blanket term for issues that can rile up the Republican base. What DeSantis and other anti-woke politicians have missed is that consumers and investors have long shopped and invested according to their own sense of ethics and values. Businesses have long realized that taking care of their employees and the environment is good for the bottom line.

Long-term sustainable growth is dependent upon companies understanding how to manage environmental, social and governance as well as financial factors. This is true for issues like climate change, human rights, equity and inclusion, employee safety and so many others. The materiality case for ESG is within the boring purview of academic papers and portfolio management decision making.

ESG has long been an exercise in highlighting investment risks that were not traditionally considered in the investment process. And there has always been and continues to be an underlying skepticism within the industry when it comes to mixing social or environmental or ethical concerns with financial concerns. These industry arguments have thankfully subsided with the recognition that ESG issues can be very material and as ESG data has become more standardized.

There has not been push back to the concept of ESG at this political level prior to the past year. Since the anti-ESG rhetoric began, a dozen states have enacted laws or adopted regulations to prohibit or discourage state pensions from considering ESG factors when investing state assets. There are measures taken in some states to require state regulators to develop and maintain a blacklist of financial firms that engage in boycotts of fossil fuel companies for divestment purposes. The flip side is that for many years now there have been laws in many states that encourage the consideration of ESG factors in state investment decisions.

One of the negative impacts of the anti-ESG rhetoric is large firms like Vanguard and Blackrock backing away from the global net-zero alliance. Presumably, they have done so for fear of losing potentially billions of dollars from certain anti-ESG state pensions. Blackrock itself has been dropped from a number of state pensions in the year since DeSantis and others have rallied around the asset management industry being ‘too woke.’ At the same time, these same asset managers have faced calls from politicians on the opposite side of the political spectrum for ‘bailing on ESG’. What is certainly clear is that large asset managers using ESG as a sales tool are at the whim of politicians on both sides of the aisle.
Long-term sustainable financial returns are inextricably linked to stakeholder governance. The positive impact that companies make on their employees, customers, and the environment where they operate and beyond drives long-term financial success. This is also true for politicians and governments: when governments begin banning books, micro-managing teachers and pensions’ decision making, and taking away the healthcare choices and other rights of their stakeholders, they will eventually face a reckoning.

*ESG refers to the environmental, social, and governance factors that investors measure when analyzing a company’s sustainability efforts from a holistic view.

ESG Investment Strategy Risk. The Fund’s ESG investment strategy limits the types and number of investment opportunities available to the Fund and, as a result, the Fund may underperform other funds that do not have an ESG focus. The Fund’s ESG strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole, or may forgo opportunities to invest in securities that might otherwise be advantageous to buy. The Fund may also underperform other funds screened for different ESG standards. In addition, the Sub-Adviser may be unsuccessful in creating a portfolio composed of companies that exhibit positive ESG characteristics.