Investors can still take the “middle path” to appease US clients while upholding sustainability-related commitments.
CEOs of leading asset management firms believe they can fulfil their fiduciary duty to drive financial returns while meeting sustainability-focused commitments and values, despite the challenges posed by the anti-ESG movement that has taken root in the US.
“We are at a crucial point for asset managers; we are going to see some polarisation in the corporate positions [they take] in the US,” said Mark Versey, CEO at Aviva Investors, speaking at the UK Investment Association’s ‘Sustainability and Responsible Investment Conference 2023: Resilience in Adversity’ on 25 May.
He said that two clear ends of the spectrum have emerged. Asset managers can adopt a position where they only focus on being agents for asset owners, providing a range of solutions for all clients.
Or they can choose to adopt a position which is fully aligned with mitigating the risks associated with climate and societal issues, and for those values to be built into the business.
If asset managers choose the latter, they risk “some backlash”, Versey acknowledged, particularly from clients in the US that “don’t have the same ethics”.
“It’s a really difficult position for [an asset manager] to be in,” he said.
Federated Hermes CEO Saker Nusseibeh said that managers can still effectively navigate the US market without having to take a polarising position.
“It all comes down to intent,” he said.
“If an asset manager says it is making sustainable investment decisions solely because it will generate more value in the long term, then that is perfectly in tune with fiduciary law as it is understood in the US.”
Federated Hermes, headquartered in Pittsburgh, is navigating this “middle path”, Nusseibeh added, asserting that the firm has made sustainability-focused commitments and has integrated those values into the business.
In instances where clients have said they have no interest in ESG, or want no exposure to ESG-related investments, Federated Hermes will invest accordingly, although Nusseibeh said the asset manager will warn these clients that they are “taking away one of the factors that Federated Hermes uses to add value”.
“We must be careful. Advocacy tends to offend more than anything else,” said Nusseibeh.
The comments were made as two more global insurers quit the Net Zero Insurance Alliance (NZIA), following a warning issued by attorneys-general of Republican-run US states.
ESG pressure cooker
Financial institutions have felt increasing pressure from the anti-ESG movement, with some buckling under the strain.
Last year, US asset manager Vanguard stepped away from the Net Zero Asset Managers initiative (NZAM), following political pressure related to its acquisition of shares in US utilities. Six of the largest US banks were subpoenaed by state attorneys-general on the grounds of their participation in the Net Zero Banking Alliance (NZBA). Additionally, insurance firms Munich Re, Zurich and Swiss Re have all exited the NZIA.
Florida’s Chief Financial Officer withdrew US$2 billion from BlackRock, the world’s largest asset manager, due to its ESG investment policies. Republican Comptroller for Texas Glenn Hegar published a list of ten finance firms, including BlackRock and Schroders, which he blacklisted due to their refusal to do business with fossil fuel companies.
Mindy Lubber, CEO of Ceres, also received a letter from six Republican members of the House of Representatives which alleged the US investor network was in potential breach of US competition laws due to members acting in concert to engage with carbon-intensive corporates through Climate Action 100+.
There are also concerns that the anti-ESG movement will lead to a possible dilution of the US Securities and Exchange Commission’s (SEC) climate disclosure rule, which has been delayed until later this year.
“I’m more optimistic,” said Peter Harrison, CEO at UK-based asset manager Schroders, noting that the firm is “on every banned list in America – something I wear as a badge of honour, as it speaks to who we are and what we want to be”.
Being blacklisted in some states has not been the impediment one might expect, Harrison added.
“I think the US is full of people who are realistic about what’s going on; there’s no point in being an equity investor investing in non-sustainable assets.
“We do actually win a lot of money across both red and blue states, even from those who are supposed to be absolutely against [ESG].
“It’s a bit of a red herring.”