Anti-trust claims seen as lacking merit, but further ‘anti-ESG’ tactics from politicians are expected in 2023.
US asset managers must expect further political assaults, but their membership of groups that support their efforts to minimise climate-related risks in portfolios managed on behalf of clients is considered unlikely to contravene the country’s anti-trust laws.
Mindy Lubber, CEO of US investor network Ceres, received a letter last week from six Republican members of the House of Representatives, alleging her organisation and its members were in potential breach of US competition laws by acting in concert to engage with carbon-intensive corporates, specifically through their participation in Climate Action 100+ (CA100+), a global investor-led initiative.
Lubber has rejected the notion that asset managers participating in collaborative endeavours aimed at assessing climate risks and reducing portfolio emissions are doing anything other than fulfilling their fiduciary duty and combining in ways similar to countless other trade associations in the investment management industry and beyond.
“This is an unfortunate politicisation of fiduciary duty,” Lubber told ESG Investor. “Investors must analyse risk. It’s what they do, it’s who they are.”
Ceres is discussing its position with lawyers, but Lubber, who sits on the steering committee of CA100+, said the collaborative actions of asset managers and owners on climate risk management are no different from many other shared enterprises in the sector.
“Investors collaborate every day. I can give you 50 organisations that they’re each involved with, collaborating on topics from cryptocurrency to trade. Climate is just one more set of discussions,” she said.
The letter, sent by Republican members of the House of Representatives’ Committee on the Judiciary, requests information from Ceres about its role in CA100+ on grounds that related conduct or agreements “may be unlawful under US anti-trust laws”.
Copied to fellow CA100+ steering committee member Simiso Nzima, Managing Investment Director of Global Equity at CalPERS, the letter accuses “woke corporations” of working together to “punish disfavoured industries” in ways that “harm American consumers”.
Lubber said the primary activities of investor networks to support members on climate risk management – such as developing and sharing of information, disclosure standards and methodologies for data analysis – is the normal course of business for “dozens of trade associations”.
“There’s nothing unique or different about this discussion that would make it anti-trust. No one is telling investors how to vote and how to build their portfolio,” she said.
Feeling the pressure
Politicians opposed to the incorporation of ESG risks into investment decisions have been opposing asset managers both individually and collectively, causing at least one – passive investing giant Vanguard – to quit the Net Zero Asset Managers initiative (NZAM), which has nearly 300 members globally, rather than face more pressure.
“Industry initiatives can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms,” Vanguard said in a statement last week. “This has been the case in this instance, particularly regarding the applicability of net zero approaches to the broadly diversified index funds favoured by many Vanguard investors.”
Vanguard, which manages US$7.2 trillion in assets, cited the need to provide investors with “clarity” about its consideration of material climate-related risks, and emphasised that the firm “speaks independently” on matters of importance to investors.
The decision was prompted by Republican attorneys-general opposing Vanguard’s application to the Federal Energy Regulatory Commission (FERC) to extend its authorisation to acquire shares in US utilities. They claimed the asset manager’s NZAM membership would negatively impact the cost and reliability of energy supplies, seeking to block Vanguard from acquiring utility shares for the next three years.
In May, Vanguard published an update outlining proposed actions in line with the firm’s NZAM member commitments, including a pledge to ensure 50% of its US$290 billion in actively managed assets are net zero-aligned by 2030. However, it did exclude its US$5 trillion in index-tracking funds from formal commitments.
“Although there have always been serious questions about how asset managers using an index fund approach could achieve a net zero greenhouse gas portfolio, some have suggested that this quick ‘about face’ indicates that the asset managers were not serious about their net zero commitments in the first place,” said Andrew Otis, Partner at law firm Kramer Levin.
“While NZAM recognises there are challenges with measuring the alignment of passive portfolios with a 1.5°C temperature rise limit and moving the companies in the index funds to rapidly decarbonise, these can only be met by strong commitments to transitioning to the zero emissions economy by investors, companies and policymakers,” said Kirsten Snow Spalding, Vice President of the Ceres Investor Network.
Nevertheless, there are concerns that Vanguard’s exit from the global initiative will prompt an exodus of other US-based asset managers, as political pressure intensifies.
At the state level, Republican politicians and officials have tightened the screw on asset managers for their incorporation over ESG factors over the course of this year. Much of this activity has been coordinated via the State Financial Officers Foundation.
Florida’s Chief Financial Officer recently withdrew US$2 billion from BlackRock, the world’s largest asset manager, due to its ESG investment policies.
In August, Republican Comptroller for Texas Glenn Hegar published a list of ten finance firms and almost 350 investments funds which he blacklisted due to their refusal to do business with fossil fuel companies. The list includes BlackRock and Schroders. The anti-ESG agenda has spread to other states, with West Virginia, Idaho and others also taking steps to bar asset managers with strong ESG policies.
Earlier this month, Senate Banking Committee Republicans published a report which criticised the ‘big three’ asset managers – BlackRock, State Street and Vanguard – noting that ESG and diversity are “political movements unmoored from financial performance”.
Nathan Fabian, Chief Responsible Investment Officer at the UN-convened Principles for Responsible Investment (PRI), countered that ESG risks, including climate change, can have a material impact on the performance of investments.
“The investment argument for ESG is clear – we know that it is additive to improved long-term outcomes for beneficiaries because it helps investors engage and allocate their capital appropriately in an increasingly challenging and fast-moving marketplace,” Fabian said, adding that “playing political football” will not further the interests of clients such as pension scheme beneficiaries.
Claims “hold no water”
Politically-motivated investigations into collective action by financial institutions on climate change were initially focused on US banks, the largest six of which were subpoenaed by state attorneys-general on the grounds of their participation in the Net Zero Banking Alliance (NZBA), citing collusion aimed at damaging the US energy industry.
This was followed by a relaxation of guidance by the Glasgow Financial Alliance for Net Zero, an umbrella group to which NZBA and NZAM belong, and raised concerns that US asset managers would also be targeted.
But challenges to coordination by investors and other institutions on anti-trust grounds “don’t appear to hold any water”, according to Chong Park, Partner at US law firm Ropes & Gray, speaking on a podcast in October.
A so-called ‘group boycott’ under Section 1 of the Sherman Act, committed by a collaborative investor-led ESG initiative, can only be considered to be breaking anti-trust laws if members are agreeing to not deal with a third party (like a US oil and gas major) as a means of harming a rival.
“Even if those investment firms were boycotting energy firms that don’t follow ESG practices, these investment firms aren’t competitors to those oil and gas companies,” said Park. “They don’t benefit from directly harming non-ESG companies, so whatever ‘boycott’ there is, it’s not about boycotting to gain a competitive advantage.”
Park noted that commitments made by members of CA100+ are also “explicitly not binding firms to any particular investment choices”.
Further, the majority of these investment managers are still invested in carbon-intensive firms through both transition/impact and non-ESG funds, either to maintain financial returns or support and accelerate the transition to net zero, he said.
But there are grounds for uncertainty as enforcement of anti-trust legislation is increasingly fragmented, with even the existence of the Federal Trade Commission under threat, making outcomes less predictable.
Nonetheless, the tension between fulfilling ESG-related objectives and maintaining strong financial returns for clients could mean that organisations like NZAM “will eventually have to be rethought and new approaches will be needed”, according to Lindsey Stewart, Director of Investment Research at data analytics provider Morningstar.
“This situation is a very good prompt to think about exactly what these organisations are trying to achieve, what is realistic for institutional investors, and how regulators, governments and the financial community can effectively work together to bring about sustainable and long-lasting change,” he said.
The slim House of Representatives majority achieved by the Republican party in November’s mid-term elections is sufficient to take control of its legislative agenda. This is expected to lead to more committee investigations and legislative proposals aimed at frustrating the efforts of investors to incorporate ESG factors into their decisions.
As well as targeting financial institutions individually and collectively, this could include efforts to limit the powers of regulatory bodies, including the US Securities and Exchange Commission (SEC). The SEC’s proposals for climate risk disclosures are widely expected to be challenged in the courts, potentially on grounds of regulatory over-reach. A bill was introduced to the House in early December aimed at “reining in” SEC rule-making.
“Both state and federal legislatures are likely to subpoena documents from asset managers and request testimony at hearings,” said Otis at Kramer Levin, noting that the Texas Senate has already subpoenaed several asset managers ahead of a hearing scheduled for this week.
“State attorneys-general could also launch formal investigations of state pension fund asset managers that have ESG policies. Thus far, state actions have focused on asset managers, however, it is possible that both state and federal investigations could expand to other financial institutions that are licensed and regulated by the state, such as insurance companies, or to corporate entities,” he added.
In light of likely future challenges, US asset managers should assess their ESG legal risk and develop an ESG legal and communication strategy to manage opposing pressure from both anti-ESG and climate activist stakeholders, said Kramer Levin’s Otis.
“Asset managers should evaluate their portfolios and determine the role that ESG plays now and should play going forward in their management strategy to maximise returns and reflect the core values of their stakeholders,” he said, adding that managers should then assess their legal risk at both the state and federal level.
Paddy McCully, Senior Analyst on the Energy Transition at NGO Reclaim Finance, said the recent “anti-ESG hysteria” would be maintained by publicity-hungry politicians. “Asset managers need to come out swinging against this politically motivated culture wars nonsense and clearly affirm that they accept that climate change is an existential threat, that they stand by their commitments to net zero, and that their fiduciary duty includes addressing climate risk,” he said.
Jessye Waxman, Senior Campaign Representative of NGO Sierra Club’s Fossil-Free Finance campaign, described recent actions as “a poorly-disguised political manoeuvre from those benefiting from fossil fuels that should not sway managers from fulfilling their fiduciary duty by managing systemic risks”.
“The best thing asset managers can do is to be responsible stewards of people’s savings by continuing to manage and mitigate climate risk,” she said.
Earlier this week, the US SIF Foundation’s latest biennial Report on US Sustainable Investing Trends found that climate change was the most important ESG issue for US asset owners for the first time.
“More investors want to be invested in a way that takes this risk into account,” said Lubber.
“Looking at the major risks has been the law of the land for investor practice forever. In 2022, analysis of climate risk is part of the normal business of investors, research houses, analysts, and thought leaders. Because the numbers are clear, and the numbers are real, and they are material.”
This article was researched and written by Emmy Hawker and Chris Hall.