Battle Lines Drawn for ESG / G&Sustainable Investment Fights in 2023

As 2022 comes to a close, certain events are shaping up in the U.S. capital markets and corporate sectors for what promises to be a titanic battle in 2023. There are challenges being mounted to investment managers openly embracing ESG / sustainability investment principles. The opponents: a number of U.S. public officials (all Republican) such as attorneys general and managers of state finances, and treasurers and overseers of public employee funds, as well as legislators, who oppose use of ESG factors by those firms hired to help manage public finance. Also in the crosshairs of these opponents: firms offering investment products that reduce or eliminate investments in fossil fuels (such as oil and gas companies) and asset managers pressuring firms to reduce carbon emissions.

There’s also the specter of greater oversight of ESG-themed investment vehicles. As asset managers and mutual fund advisory firms steadily move more sustainable and ESG-themed investment vehicles to market, they are being challenged by the European Union to “re-think” how they design and market ESG funds (known as Article 8 funds in the EU). In our Top Stories below, Bloomberg News reports that fund managers are bracing for “ESG correction” with US$4 trillion at stake. ESMA, the European watchdog agency, is working to set quantifiable ESG and sustainability investing standards and firms not meeting standards could mean forfeiting the right to market an investment product as an “ESG” fund.

In the U.S., the Securities & Exchange Commission is challenging investment advisors and investment companies about their ESG investment practices with a proposed rule that would “promote constant, comparable, and reliable information concerning funds’ and advisors’ incorporation of ESG factors.” Said SEC Chair Gary Gensler: “I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus…ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

As investment advisors, investment companies, and mutual fund advisors work to meet these proposed regulatory challenges, the attacks on capital markets firms from Republican state officials pose a different kind of challenge – one directly aimed at the pocketbooks of asset management firms. Beginning in the late summer, legislators in numerous states – including Texas, West Virginia, Oklahoma, Kentucky, Utah – began filing “anti-ESG bills.” These included a bill in Texas to prohibit investments in companies that “boycott” certain energy companies, and the “No Social Investment Bill” in North Dakota. “Boycott” bills are focused on capital markets firms that “discriminate against” fossil fuel energy companies, and also for some states, firms that “boycott” companies involved in mining, certain agricultural practices, and production of lumber products.

The objective: to force firms managing state funds (such as for public employee pension funds) to abandon ESG strategies, policies, and practices. BlackRock, the nation’s largest asset manager (almost US$10trillion in AUM) is a top target of state officials, as the firm has declared its intent to lead in sustainable investment and BlackRock CEO Larry Fink laid out the case for “capitalism and sustainability” in his 2022 annual letter to corporate CEOs: “Most stakeholders – from shareholders, to employees, to customers, to communities, and regulators – now expect companies to play a role in decarbonizing the global economy. Few things will impact capital allocation decisions – and thereby the long-term value of your company – more than how effectively you navigate the global energy transition in the years ahead.”

This approach drew the wrath of Texas Republicans, recently holding a hearing at whether BlackRock (and State Street) are urging companies to cut carbon emissions and “putting too much pressure on the companies in their portfolios.” BlackRock has been targeted by officials in Texas and Florida for urging companies to cut emissions – including oil and gas firms.

As 2022 calendar pages fall away, the G&A team wishes you happy holiday celebrations and a Happy New Year, and we invite you to “stay tuned” to 2023 events. The battle lines are clearly drawn now, with proponents of sustainable investment on one side and powerful forces lined up on the other side taking action and warning against “the dangers of ESG.”

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.