1.Why has the US been unreceptive towards ESG?
As US statehouses begin their 2023 sessions, there has been a surge in the number of proposed bills that address ESG investment. These bills view ESG considerations as harmful or otherwise unwanted, a stance which many American stakeholders have long held. However, these anti-ESG bills are as a result of misconceptions about ESG investments’ purpose, possible value creation and how they should be carried out. Many of the bills assume that ESG provisions will lead investment managers to sacrifice financial returns in order to address non-financial issues while in reality; ESG investing involves appropriately accounting for all value drivers. This is no surprise as in the US the potential for profit or loss remains investors’ primary concern when selecting stock, with ESG considerations being secondary. While many top corporations have embraced ESG publicly, the reality is that many executives are less supportive of this rising investing philosophy. Only 25% of CFOs in a recent survey say that they support the Securities and Exchange Commission’s (SEC) climate disclosure proposal while roughly as little as 4 in 10 US investors say they look into corporate governance policies or social values upheld by company leadership and even fewer, 3 in 10, will research the environmental impact of a company. A critical issue for CFOs with the aforementioned SEC proposal is the claimed lack of clear correlation between climate data and financial statements.
2. How can this pushback be seen?
ESG is controversial not only among investors but politicians as well. The misconceptions have exacerbated the political divide of the US with ESG being cited as a “political battleground” as certain states are particularly dismissive of ESG metrics and view them as “whimsical notions of a utopian tomorrow”. This is in stark contrast to European investors who have been more receptive to ESG issues.
The state of Florida, for instance, has recently passed a resolution that bans pension funds from considering ESG metrics, insisting that investment decisions must be based only on financial or pecuniary factors. Florida’s governor believes that by passing this bill, he is “reasserting the authority of Republican governance over corporate governance”. He also believes that rejecting ESG metrics ensures financial security and political sovereignty. In Texas, a law passed in 2021 restricted the state, localities and pension boards from working with financial firms looking to divest from the fossil-fuel industry. Other Republican states such as Idaho, Oklahoma and West Virginia have also enacted similar resolutions including prohibiting asset managers who are seen as ESG-friendly from managing state funds and bidding on new state business contracts. These notions seem to be widely supported as 45% of CFOs in the US said that they are in support of these bans while 25% were in opposition.
The US’ commitment to sustainability has notably always been inconsistent, after withdrawing from and reentering the Paris agreement in 2020 and 2021 respectively. With this in mind, ESG investors will question the reliability of the US’ participation in the transition towards a sustainable economy. However, being on the eve of mid-term elections as well as the upcoming presidential election could change the federal stance. Politicians have begun to use ESG in their political rhetoric and as headline-grabbing policy announcements.
3. The future of ESG and the US
Because of their global influence, one might wonder if the US’ political division on ESG will be imported to Europe. However, Europe is far ahead on the ESG investment curve. There is still political tension regarding ESG investing in the US but progress is being made. In 2021, Engine No. 1, a relatively small firm, rattled corporate America after successfully convincing some of Wall Street’s biggest investment firms to approve their proposal to replace 3 directors on Exxon Mobil’s board, citing a decarbonising world. Investors are also pushing executives across corporate America to file more details about their carbon missions, measures about their impacts on human life and audits for racial equity. Interest is particularly strong among younger investors with 70% of millennials saying they would invest in plans for the first time or increase their contribution rate if they had access to sustainable investment options.While there has been increasing investor interest in ESG, the political and regulatory environment is another story.
References:
https://news.gallup.com/poll/389780/investors-stand-esg-investing.aspx
https://capitalmonitor.ai/regions/america/mapped-the-polarisation-of-esg-in-the-us/
https://www.ft.com/content/f5fe15f8-3703-4df9-b203-b5d1dd01e3bc
ESG backlash: How companies really feel about ‘woke’ investing (cnbc.com)
ESG investing: why does the US still lag behind? (raconteur.net)