Debate on investment-related climate risks intensifies

STEVE KARNOWSKI and STANLEY CHOE Associated Press

ST. PAUL, Minn. — The political fight is getting fiercer over whether it’s financially wise or “woke” to consider a company’s impact on climate change, workers’ rights and other issues when making investments.

Republicans from North Dakota to Texas are stepping up their criticism of “ESG investing,” a fast-growing movement that claims there can be benefits from considering environmental, social and governance issues in company when deciding where to invest pension funds and other public funds. At the same time, Democrats in traditionally blue states like Minnesota are considering making ESG principles an even bigger part of their investment strategies.

The “E” for the environmental component of ESG often receives the most attention due to the debate over whether to invest in fossil fuel companies. In the broad social spectrum, or S, investors examine how companies treat their workforce, believing that a happier group with less turnover may be more productive. For aspect G, or governance, investors ensure that corporate boards hold executives accountable and compensate CEOs in ways that encourage the best performance for all stakeholders.

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The ESG industry has markers that give companies ratings on their environmental, social and governance performance. Poor scores can steer investors away from companies or governments considered higher risks, which in turn can increase their borrowing costs and hurt them financially.

Florida has become one of the hottest battlegrounds for ESG. In August, Governor Ron DeSantis banned public fund managers from using ESG considerations when deciding how to invest public pension money. And even as his state cleans up from the environmental destruction caused by Hurricane Ian, DeSantis plans to ask the Florida Legislature in 2023 to go even further by outlawing “discriminatory practices by large financial institutions on the basis of ESG social credit score metrics”.

Pension funds are often caught in the middle of battles. Questions are pouring in from teachers at the Florida Education Association about what DeSantis’ moves will mean for their retirement.

“I usually tell them it’s still not clear exactly what that means,” said Andrew Spar, president of the union, which represents 150,000 teachers and educators across the state. There is still much to be determined, including which funds pension investments will be directed to.

In contrast, the Minnesota State Board of Investment is considering a proposal to adopt a goal to make its $130 billion in pension funds and other funds carbon neutral. The board is already using shareholder votes to advance climate issues. It seeks climate-friendly investment opportunities and avoids thermal coal investments. Although the new proposal goes further, it does not call for a total divestment from fossil fuel companies, as many climate change activists are advocating.

The ESG debate has spilled over into the race for Minnesota state auditor. Democratic incumbent Julie Blaha — who has singled out DeSantis as one of the leaders she says is politicizing the ESG discussion — cited the investment advisory’s strong returns in recent years as evidence that the approach is working.

“To be a good fiduciary, you have to consider all the risks, and clearly climate risk is an investment risk,” Blaha said.

But Blaha’s Republican challenger Ryan Wilson says returns on investment must come first and all risks must be considered. He says the board should not “disproportionately dictate” that climate risk should matter more than other risks.

Proponents argue that considering a company’s performance on ESG issues can boost returns and limit long-term losses while being socially responsible at the same time. By using such a lens, they say investors can avoid companies that are riskier than they appear on the surface, with stock prices that are too high. An ESG approach could also reveal opportunities that may be underestimated by Wall Street, it is thought.

When it comes to returns, there is no consensus on whether an ESG approach means lower or higher returns.

Morningstar, a company that tracks mutual funds and ETFs, says just over half of all sustainable funds ranked in the top half of their category for returns last year. Over five years, the performance is better with almost three-quarters ranking in the top half of the category’s top performers.

ESG rejection can be costly in ways other than investment performance.

A Texas law that took effect in September 2021 prohibited municipalities from doing business with financial institutions that have ESG policies against investments in fossil fuel and firearms companies, industries that are important to the economy. Texas economy. It turned out to be a costly decision.

Banned from underwriting municipal bonds in local jurisdictions, five major underwriters – JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Fidelity – left those markets. A Wharton School study estimated that losing these big players would cost communities in Texas between $303 million and $532 million more in higher interest payments on their bonds. Fidelity says it has since restored its good name with Texas by certifying to the state that it does not boycott energy companies or discriminate against the gun industry.

Several large Wall Street banks and investment management firms have become favorite targets of anti-ESG politicians because they have openly embraced ESG. Republican state treasurers have withdrawn or plan to withdraw more than $1.5 billion this year from BlackRock, the world’s largest investment firm, which has a goal of net-zero greenhouse gas emissions from 2050 or before. Missouri last month became the last. Treasurer Scott Fitzpatrick accused BlackRock of placing the advancement of an “awake political agenda above the financial interests of their clients”.