Though anti-ESG rhetoric has amped up since the term entered the country’s political bloodstream, one advisor believes the vocal opposition could end up ultimately helping ESG strategies in the long run.
“I don’t think it’s finished and over and done with, but it’s a hot mess right now. I think that’s a good thing,” said Liz Simmie, the co-founder of Honeytree Investment Management. “It’s driving clients who think they care about this stuff to dig deeper and to ask better questions and come to their advisors, which is how it’s always been.”
As a result, Simmie said she was “optimistic” about the strategy’s future. Her comments came during a panel at this week’s Wealth Management EDGE Conference, which took place at The Diplomat Beach Resort in Hollywood Beach, Fla.
The political rhetoric from legislators and politicians has continued to ramp up in the past year, with numerous calls that the strategy prioritizes Democratic policies as a form of “woke capitalism.”
According to a report from PGIM DC Solutions, state legislators have introduced dozens of ESG-related bills, and though some of these are progressive in nature, most are Republican-backed measures aimed at stemming the practice. In March, President Joe Biden issued his first veto overturning congressional legislation that would have rescinded a Labor Department rule permitting ESG considerations by investment managers.
Panelists noted the irony of the panel taking place in the Sunshine State. Florida Gov. Ron DeSantis is one of the most vociferous critics of ESG, including a high-profile battle with The Walt Disney Co. in the run-up to his entrance in the 2024 race for the Republican Party's presidential nomination. (DeSantis officially entered the race on Wednesday, but he currently trails former President Donald Trump in national polls of GOP voters.)
Aside from the political turmoil, Eric Balchunas, a senior ETF analyst and fund products specialist for Bloomberg, said ESG was having a “rough year,” including a slowdown in flows as well as BlackRock facing fire over its ESG strategies.
The rise in interest rates has dragged down performance as well. In fact, Balchunas said he believed Federal Reserve Chair Jerome Powell had done much more to derail ESG than DeSantis and called the political rhetoric a “sideshow.”
“If you perform, no one cares what Ron DeSantis says,” he said. “If you underperform, then that stuff seems more important.”
At one point, Balchunas asked Luke Oliver, a managing director and head of climate strategies at KraneShares, whether his firm’s China ESG Leaders ETF was an “oxymoron” considering China’s troubled environmental record.
Oliver stressed that if an investor focused on national and international policies, changes and investments in renewables were no longer aspirational but actual. The U.S. Inflation Reduction Act passed last year spent (and encouraged spending) approximately $360 billion on renewables, while China invested $500 billion in renewables last year alone (with the European Union launching its own $288 billion answer to the IRA earlier this year).
“There’s an arms race already happening,” Oliver said. “If you believe and think how you’ve always thought as an investor, you want to get into these environmental plays because that’s where the money is.”
The question of whether to “tilt” or “exclude” certain companies from ESG funds and strategies has long gnawed at advocates and critics alike. Julie Cane, the CEO and co-founder of Democracy Investments, runs an ETF that relies on the former; as a result, the fund invests more in energy companies in Norway and Canada, as opposed to Saudi Arabia.
With scale, Cane said investors would have greater leverage to force the hand of authoritarian states (or companies with poor climate records).
“An oil and gas company will always be an oil and gas company,” she said. “If you want to incentivize them towards renewables, you could reward the companies that are doing that."