Three Republican candidates for the White House are vocal advocates against pension funds adopting environmental, social and governance (ESG) investment practices. 

First, there is Vivek Ramaswamy, who launched Strive Asset Management as an ‘anti-woke’ alternative. The second candidate is Florida governor Ron DeSantis, who, at the time of writing, is not yet officially a candidate, but is very likely to throw his hat in the ring. DeSantis is the leader of an alliance of 19 governors, all Republicans, against what he calls “Biden’s ESG financial fraud”. And of course there is former President Donald Trump, whose administration discouraged retirement plan managers from incorporating ESG factors into investment decisions. 

On the other hand, President Joe Biden, running for re-election as the Democratic candidate, in March this year vetoed a bill – approved by both the Senate and the House – which wanted to repeal his Labor Department rule that permitted retirement investing tied to ESG criteria. 

Driven by politics

So ESG has become a hot political topic and the controversy is having an impact on institutional investors and the whole asset management industry.  

“Three quarters of the asset managers polled by our firm cite that clients’ belief that ESG is mainly driven by political views is at least a moderate challenge to increasing client receptivity of ESG issues, up from 49% in 2021,” says Michele Giuditta, director of the institutional practice at consulting group Cerulli Associates. 

Michele Giuditta

“About one quarter of asset managers say that while they will continue to incorporate ESG information into decision-making, they are being more cautious about their messaging to clients” 

 Michele Giuditta

“Additionally, our survey of institutional investors shows that board/investment committees’ belief that ESG is driven by political views is cited as at least a moderate challenge by 62% of institutions polled.”  

However, recent political pressure has not deterred asset managers from incorporating ESG data into investment decision-making, according to Cerulli. “Nearly all asset managers polled in 2022 have (96%) or plan to have (2%) an ESG integration approach,” Giuditta says.  She adds that the firm expects the final data for 2023 to be consistent with last year. “Preliminary research results show that about one quarter of asset managers say that while they will continue to incorporate ESG information into decision-making, they are being more cautious about their messaging to clients and prospects.” 

Redefining fiduciary duties

One of the effects of the current debate could be a redefinition of pension trustees’ fiduciary duties. “Some continue to view any investment style that places emphasis on people and planet alongside returns as a potential distraction from the good-old-fashioned fiduciary duty that investment managers owe their clients,” says Laura Boyle, head of stakeholder engagement at impact investment fund Snowball IM. 

“Yet all this legislation, such as Biden’s Labor Department rule, does is widen the thinking around what fiduciary duty truly means. As the understanding of fiduciary duty evolves past maximising financial return alone, this is simply another step in the rapidly accelerating movement towards a better understanding and definition of the responsibility of directors’ duties which properly allow companies to respond to modern crises as society expects and the planet demands.” 

Boyle cites new precedents being set by judgements such as Butler-Sloss in the UK last summer that permitted the trustees of two charitable trusts to implement a Paris-aligned investment strategy, even though this might cause financial harm in the short term, as well as the Better Business Act campaign. She says: “The cost of a negative planetary or societal impact of an investment will be factored into its price sooner or later, and the world urgently needs the financial system to deliver a better quality return.” 

The Cerulli survey shows that 62% of asset managers cite fiduciary duty as a significant factor for using ESG data in investment analysis and decision-making. Another 35% believe that it is somewhat of a factor. “Near-term, I believe ESG will remain a matter of professional judgement as opposed to a matter of legal obligation,” comments Giuditta. 

Cino Robin Castelli, head of climate transition risk model development at Citigroup and co-author of ‘Quantitative methods for ESG finance’, says: “It is likely that this will continue being a hot topic for quite some time to come, as there is no clear solution, save that of having explicit approval from the investor base in each pension fund on how they want their funds to be managed.” 

He adds that the current political discussion can be considered part of the growing pains that come with a sector that has grown explosively over the years without much regulation and standardisation. 

“In the long term it is likely that the result of the debates and discussions will be actually beneficial both to the investment community, via the implementation of clear standards and rules that apply to ESG, as well as for the investors and the communities that are more vulnerable to the effects of climate change,” he says.