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Anti-ESG is on the rise in the United States. What’s behind the phenomenon, and should investors be concerned about the sustainability of their American fund investments?

Anti-ESG was one of the hottest topics in the US investment circles in 2023. At the heart of the movement is a loud group of people who believe that considering factors like the environment in investing is financially harmful, some even calling for legislation that would ban using ESG factors in investment decisions. The opponents of ESG believe that it will stump company growth and innovation and limit the freedom of people, institutions, and the state.

Anti-ESG is highly politicized. The US is ever more divided in two: whereas some states demand more detailed reporting from companies on their sustainability efforts and climate impact, other states are pushing legislation that makes taking ESG into account in investment decisions more difficult. The anti-ESG movement has gained additional momentum from oil and gas companies who feel that ESG threatens their business and have the money to lobby for new legislation.

In addition, the current economic climate has most likely spurred the anti-ESG sentiment further. Sustainability and ESG took centre stage in investing when the times were good. Now, when the economic outlook is much more uncertain, more people question the financial benefits of ESG.

Will European fund investors suffer from anti-ESG?

Even though anti-ESG has gotten a lot of attention in the media, especially in the US, its concrete effects are still relatively limited. Currently, only sixteen states have rolled out anti-ESG legislation, and bills have been stopped even in Republican-controlled states. Especially legislation forbidding state pension fund managers from using ESG criteria has gotten a lot of media coverage.

This kind of anti-ESG legislation has the biggest effect on investing in so-called impact funds by these certain state pension funds. In impact funds, investment decisions are guided by specified sustainability criteria, aiming for measurable impact. Conversely, the impact of the anti-ESG legislation is limited in funds that incorporate ESG factors into their standard investment process but don’t base their investment decisions on sustainability goals.

Therefore, European investors who invest in US funds have experienced minimal impact. The most significant change is how US fund managers communicate about ESG topics. They are now more mindful of how they speak of their ESG activities, and they aim to draw a clear distinction between ESG and impact investing, explaining that considering ESG is financially beneficial. Some fund managers avoid using the term ESG altogether, as the word itself is so loaded. Larry Fink, the CEO of BlackRock, the world’s largest asset manager, has stated that he won’t use the term ESG anymore as it is so politically charged. However, according to Fink, this will not affect BlackRock’s investment policies or ESG integration.

The anti-ESG phenomenon hasn’t had an impact on Evli’s private asset funds investing in the US market. We’ve talked with many US fund managers who say they will keep on focusing on ESG and don’t feel the need to change their approach due to the anti-ESG sentiment. In their external communication, many fund managers highlight that their ESG approach is aligned with the goal of maximizing profits.

Hence, our private asset clients don't need to worry too much about anti-ESG measures or a direct impact on the sustainability of their fund investments in the US. Investors worldwide will likely continue using ESG data in their investment decisions and all the US fund managers we interviewed assured us that ESG remains their focus. In addition, more transparent communication about ESG will benefit investors on its side.

What are the impacts of anti-ESG going forward?

Is it possible to fight anti-ESG? If the anti-ESG sentiment is based on financial concerns, money is also the strongest counterargument. Taking environmental, social, and governance factors into account in business and investments is profitable, especially in the long run. There are several significant material risks related to climate change and biodiversity loss, and managing these risks has nothing to do with ideology. In many US states, anti-ESG legislation has halted due to financial realities, as it has become apparent that pulling out assets from certain investments would lead to losses of millions of dollars. In addition, in some states that have passed anti-ESG legislation, public pension fund managers have argued against divesting assets from specific funds, as it would violate their fiduciary duty to put investors and their profits first.

One can also think that the anti-ESG movement can give birth to something good. As proponents of ESG, we must be clear and uniform in our messaging on why considering ESG factors is essential. Reporting on sustainability efforts and results must be more open and commensurate. This will not only alleviate the worries of many ESG sceptics but also make decision-making easier for us pro-ESG investors due to better data.

Despite the counterreactions, sustainability remains a growing emphasis in business and investing. The anti-ESG movement is still limited to the United States, and we don’t expect it to spread to Europe, where we, overall, are ahead in sustainability matters. We at Evli will continue to keep tabs on the anti-ESG movement, convinced that taking sustainability into account is profitable, here and globally.

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