Angeles’ Shah Says Pushbacks May Happen But ESG Trend Will Remain For The Long Term
Just a few months ago the ESG movement appeared as unstoppable as the Instagram account of a popular musician or professional athlete – then a multitude of state governments and pension funds – especially states with large fossil fuel industries – began to push back against ESG, including Texas, Florida, Idaho, West Virginia, Alaska and North Dakota.
More recently, CNBC reports significant doubt about and opposition to ESG from a survey of Fortune 500 CFOs, with only 25% of those surveyed supporting the SEC’s climate disclosure proposals and 45% supporting the states’ pushback against ESG.
The sudden opposition to what so recently looked like the assured future trend can leave investors and their advisors nervously undecided between moving forward with ESG-centric investing and retreating to familiar ground.
An affiliate of Angeles Wealth Management, Angeles Investments helps clients determine their social impact goals and customize portfolios aligned with those objectives, then updates both the goals and portfolios through ongoing dialogue.
Prior to Angeles, Shah spent over 13 years at PIMCO, where she led global initiatives focused on advancing sustainability efforts as Head of Corporate Responsibility and Executive Director of the PIMCO Foundation.
We asked her about the drivers behind the ESG pushback, how different types of investors interact with ESG and what comes next.
WSR: Tell us about the recent pushback against ESG. What’s happened and why? Are current market issues feeding into the pushback?
Shah: The primary secular drivers of ESG pushback for both individuals and institutions are:
- Even as ESG products continue to proliferate, a lack of objective benchmarks and data standardization requirements makes ESG assessments challenging. This is further exacerbated by the fact that ESG assessments amongst major rating providers and asset managers vary widely across ESG factors.
- As the SEC and other global regulatory agencies crackdown on “greenwashing” and have fined prominent managers for ESG misrepresentation, skepticism about the authenticity of ESG-labeled products, as well as the ability for asset managers to implement ESG efforts in a manner void of conflicts of interest, has increased.
- The role of fossil fuel divestment, and divestment in general, is an increasingly divisive topic, with certain public pension plans and foundations choosing to utilize this exclusionary strategy, while states such as Florida, Arizona and Texas have recently implemented ESG-related restrictions on behalf of investment pools under their oversight.
The continued development of data and reporting standards may alleviate current ESG challenges, but the interim uncertainty creates some tumultuousness for investors, asset managers and regulators.
More recently, ESG pushback may be elevated given the underperformance of certain ESG strategies with no exposure to the traditional energy sector at a time when this sector has significantly outperformed the broader market. This year through October 10, the S&P Energy Sector Index was up over 43% as compared with the S&P 500, which is down almost 18%.
The above factors may make investors wary about the best way to pursue an ESG strategy, though anecdotally clients continue to express interest in the topic.
WSR: Do you see individual or institutional investors participating in this pushback, or is it mostly confined to certain government entities?
Shah: As private investors, both individual and institutional, and public investors, such as governmental bodies, demand more accountability for the inputs, outcomes and consequences of ESG-related investment decisions, I believe all of them will review ESG products and claims with an increasingly discerning eye.
Each investor type will have a different way of demanding accountability. Institutional investors, including government entities, have the ability to promote or restrict ESG-aligned strategies within the investment pools they oversee and engage in very detailed dialogue with asset managers to assess the validity of their ESG investment approach.
All investors, including individuals, will likely push back against those managers where there is a clear disconnect between their organizational values and the ESG value proposition.
However, I don’t believe it’s possible for any of these investors to shun ESG entirely even if any are philosophically opposed to that type of decision-making process. While it’s possible to avoid investments that claim an ESG focus, it is impossible to avoid the necessity that investment analysts and portfolio managers consider ESG topics in their evaluation of investment assets given ESG factors’ potential influence on future earnings.
For example, increasing numbers of environmental and social shareholder proposals have characterized the 2022 proxy season.
WSR: What do you expect to happen next in the pushback? Is it a long-term trend?
Shah: While moments of more significant pushback may arise from time to time, I would characterize ESG investing as a long-term trend. Ultimately, most individuals and institutions want to ensure they are investing in a manner that provides long-term financial security but doesn’t harm the long-term health and well-being of their communities.
The ESG movement highlighted that individuals and institutions do have important roles to play in advocating for issues such as social justice and a healthy planet. Although there may be differences in perspective of what exactly that entails, I do not foresee a situation where investors will not want options to invest alongside companies and organizations that are most aligned with their value system.
Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at email@example.com