Republican Attacks on ESG Will Restrict Impact Investing in US, Adviser Says

Frances Schwartzkopff and Nishant Kumar

September 30, 2022 at 6:36 a.m.·3 min read

(Bloomberg) -- A wave of political attacks on ESG that have led to changes in legislation across several Republican states will probably “restrict” impact investing in the US, according to hedge fund adviser NorthPeak.

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In an analysis sent to clients and seen by Bloomberg, NorthPeak characterized an anti-ESG campaign led by key GOP figures as resting on a misconception of the investment model. The paper, titled The Perversion of the ESG Label, called the “ferocity and scale” of the criticism “unprecedented,” and urged funds to step up efforts to educate stakeholders as part of a coordinated plan to defuse tensions.

As the US heads into midterm elections, high-profile Republicans including Florida Governor Ron DeSantis have singled out “ESG” as a target of their derision, telling voters it’s anti-American to take environmental, social and governance risks into consideration when investing or doing business. Over a dozen Democratic states have launched a counter-movement, leaving fund managers struggling to navigate the new landscape.

“Anecdotally, we have heard cases of managers feeling the need to create two separate pitchbooks to avoid politicized debates about values, even though their investment process is the same,” said NorthPeak.

The attacks by the GOP, which have led to legislative changes mostly targeting financial firms perceived as being hostile toward the fossil-fuel industry and the firearms sector, will probably alter some corners of the investing landscape, NorthPeak said. As of early September, 18 traditionally GOP states had proposed or enacted some version of anti-ESG legislation, NorthPeak estimates.

“In practice, these acts are very likely to restrict ‘impact investing,’ where asset managers are willing to sacrifice financial returns in order to achieve quantifiable, positive impact, although concessionary impact investing is currently restricted by fiduciary duty considerations,” it said.

However, the extent to which this applies to managers engaging in so-called ESG integration remains to be seen, NorthPeak said, referring to an approach whereby investment managers screen portfolios for ESG risks and opportunities with a view to maximizing returns.

“Even though ESG integration is separate from impact investing, the way in which these two terms have been conflated may inadvertently affect asset managers who explicitly state they are accounting for ESG factors during the investment process,” the adviser said.

NorthPeak focuses on ESG issues from its base in London. Its clients include Balyasny Asset Management, Magnetar Capital, Trium Capital and Sand Grove Capital Management.

The ‘Hypocrisy’

The anti-ESG bills “highlight the hypocrisy of prescribing that the investment industry should invest in what is in the best interests of certain industries in the states, but disguising this under arguments of prioritising investment returns, which makes little sense,” NorthPeak said. “Investment professionals themselves are best suited to decide what they believe will maximize their returns.”

Fund managers are now being advised to respond to the new political climate around ESG by being more deliberate in stating their strategies and working closely with regulators and clients to tackle any misunderstandings.

NorthPeak said it’s key to “get everyone up to speed,” and then “formalize the consideration of ESG factors” with more documentation to help defend strategies. Fund managers also should seek to collaborate with industry bodies and their peers, and make sure they attend conferences and events and publish research.

“At the end of the day, these are protectionist acts,” NorthPeak said of the GOP’s anti-ESG measures. They seek “to insulate industries that have strong connections to the local citizens.”

(Adds details on NorthPeak’s focus, where it’s based, and clients in ninth paragraph)