The pushback against environmental, social, and governance investing by red state politicians isn’t yet slowing down many asset managers’ expansions into strategies that have been among the most popular in recent years.
There’s no doubt the anti-ESG movement is gaining traction and could disrupt the industry. Most recently, Florida Governor Ron DeSantis passed a resolution that barred the Florida State Board of Administration from considering ESG factors in its investment process. Other Republican-led states, like West Virginia, Utah, Minnesota, Louisiana, and Arizona, have proposed anti-ESG bills that could limit — or completely ban — state institutions from working with managers that use ESG-related factors in their investment processes.
But for many global managers targeting investors in the U.S. it’s been business as usual.
BNP Paribas Asset Management, a $500 billion firm with 65 percent of its assets under management in Europe and 10 percent in the Americas, is continuing to target institutional clients that want sustainable investments, which is a core tenet of the firm’s strategy that it says it won’t abandon amid regulatory upheaval.
Instead, Sandro Pierri, chief executive officer of BNP Paribas Asset Management, said the firm will wait for guidance and adjust to it. Pierri said the firm already confronts the complexity of different rules on ESG in different countries and regions. “It will be impossible to see a global [regulatory] convergence,” Pierri said. “We will adapt.”
BNP Paribas is pragmatic about the growing influence of ESG critics. When asked how the firm would address clients that do not have the same level of conviction on the value of sustainable practices in the investment process, Pierri said, “We are not for everyone.”
Jamie Franco, head of fixed income ESG at global asset manager TCW, said client demand for ESG products and integration has not wavered. If the regulatory environment in the U.S. undergoes a shift, Franco said, TCW, like BNP Paribas, will “adapt.”
“Both the political and the regulatory attention [are signs] of the ESG investing market maturing,” Franco told II. “To me, it’s not an existential threat to what is a very robust market.”
Not surprisingly, Brent Newcomb, president of Ecofin, which is focused solely on sustainable investments, said his firm won’t bend under political pressure.
He believes competitors are also sticking to the plan. Newcomb said for asset managers with “long-standing” and “robust” commitments to ESG and sustainable investing, there isn’t a “whole lot of confusion [about] what their strategy is right now.” Asset manager Harding Loevner is unmoved by the politics. Apurva Schwartz, portfolio specialist, said the firm has no need to rethink ESG as it has been a critical aspect of the firm’s approach since it was founded in 1989.
Other officials at some of the largest asset managers in the U.S. who talked to II on background said the red state pressure is dismaying, but they’re forging ahead regardless. They say their research shows that there is significant demand from both institutional and retail investors.
The political and regulatory environment, however, has prompted managers to take a step back and seriously analyze their ESG commitments. Sam Iles, director and co-head of distribution at Alpha FMC, an asset management consultant, said the debate is a “core area of focus for the industry” right now. While asset managers aren’t abandoning established ESG initiatives, their loyalty depends on the legacy of the manager.
Firms that are entirely focused on ESG and those that offer both ESG and traditional strategies may make different decisions.
“[The debate] is forcing them to pause and think about the right way to approach this,” he said.
Newcomb, like Pierri, said the bigger issues for managers are pending regulations around the world and changing standards for what qualifies as an ESG fund.
In August, 700 ESG funds in the European Union were downgraded under new rules. Some asset managers expect U.S. regulators to demand similar transparency from managers who claim to use ESG factors in their investment process.
Schwartz said the increased attention on ESG highlights the need for asset managers to “do what they say they are doing” with clearer definitions and increased transparency. “It’s not simply enough to put the word ‘sustainable’ into your strategy and call it ESG,” Schwartz said.
