Entrenched parties, resistance to change, stifling economic opportunities in ESG

By April of 2023, state legislatures had filed 99 anti-ESG bills, according to Reuters. Many of these bills are motivated by the perception that investors who prioritize environmental, social, and governance (ESG) compliance by companies in which they are investing are imposing their political beliefs on others. Furthermore, some believe that ESG considerations inhibit investors and thus hurt returns. On the other hand, some critics of these bills argue the opposite: that it is restricting ESG investing that jeopardizes investment returns. In fact, Research from Pitchbook found ESG investing can have as big a return as investing in non-ESG-driven investments.

The term “ESG” was coined by a joint initiative of financial institutions which were invited by United Nations Secretary-General Kofi Annan to “develop guidelines and recommendations on better integrating environmental, social and corporate governance issues in asset management, securities brokerage services.” The participating institutions presented ESG as a superior investment approach in the publication, Who Cares, Wins: Connecting Financial Markets to a Changing World. Their recommendations marked the beginning of the financial world's embrace of ESG investing.

In the publication, which came out in 2004, these institutions laid out the Principles for Responsible Investment (PRI) and invited asset owners, investment managers, and service providers to become PRI signatories. Today there are -5,352 PRI signatories. In their study mentioned above, Pitchbook compared the returns obtained by 2,351 PRI signatories vs. non-PRI signatories to obtain their data about the impact of ESG on investment returns (note the list of signatories continues to grow so not all were old enough or available for inclusion in Pitchbook’s study).

Backlash from some states

In addition to attacks through state legislatures, and either unaware of the returns potential or choosing to ignore the data, several state elected leaders have opposed ESG investments on non-economic or “non-prudent man” grounds. For example, eleven state officials from Arkansas, Utah, Texas, Florida, Louisiana, Missouri, Arizona, North Carolina, South Carolina and West Virginia, have targeted for disinvestment BlackRock, the world's largest asset manager because of its backing of ESG. In August 2022, 19 state attorneys general sent a letter to Lawrence Fink, a co-founder and current CEO of Blackrock, criticizing the company for using ESG criteria in managing pension funds. Going a step further, in May 2023, Gov. Ron DeSantis banned the consideration of ESG criteria in the decision process for investing Florida’s pension funds.

Despite opposition advanced by the examples above, ESG investing would appear to be on the rise. Pitchbook’s 2022 Sustainable Investment Survey reports that 61% of North American investors applied ESG criteria to their investment decisions.

Large investors agree with the UN report saying better consideration of environmental, social and governance factors will ultimately contribute to stronger and more resilient investment markets, as well as contribute to the sustainable development of societies.”

But other perils to impact investing are presenting themselves in addition to anti-ESG politics resisting positive change. On October 25, 2023, Bloomberg reported Morningstar analysis finding at least one-third of the $6 Trillion in ESG funds classified as Article 8 by the E.U. have no actual ESG screens. Some asset managers, the article suggests, apparently entrenched in their past greed-first ways, simply want to cash in growing investor appetite to direct their assets toward doing good as well as doing financially well.