So-called anti-woke forces blurring the lines between culture and finance could be winning over investors in the United States. But Canadians, so far, aren’t buying it.
At least 19 state governments in the U.S. have launched attacks against environmental, social and governance (ESG) investing – plunging corporate sustainability into a bubbling cauldron that already contains efforts to prevent schools from teaching children about systemic racism or gender identity. This really began taking hold last year.
One of the main instigators is Florida Governor and Republican presidential candidate Ron DeSantis, who last month signed a bill into law that prohibits state officials from investing public money to advance ESG goals, and also bars sales of bonds that feature ESG characteristics.
“We want them to act as fiduciaries. We do not want them engaged on these ideological joyrides,” Mr. DeSantis said upon signing the bill.
His brother-in-arms, Governor Greg Abbott of Texas, sings the same tune – writing to President Joe Biden in May to complain that efforts to promote ESG standards in investment funds amount to an attack on the energy industry.
“By pushing this radical ESG agenda, you are risking the lifelong savings of millions, for political points,” Mr. Abbott said.
Leaving aside attempts to disallow what are essentially risk-management tools – analyzing, say, what might befall a company if it pollutes a river or taps a supply chain that uses slave labour – this campaign may be creating the uncertainty in the U.S. its proponents wanted.
In the first quarter, investors pulled US$5.2-billion from U.S. sustainable funds, marking the third consecutive quarter of outflows, according to Morningstar. The research agency said US$12.4-billion has been withdrawn from the funds over the past year.
Several macro factors were behind investors’ decisions to cash out, it said, including the energy crisis generated by Russia’s invasion of Ukraine, high interest rates and rising worries about a recession.
But Morningstar also threw the backlash into the mix, saying it may also be influencing investors as Republican governors “pledge to resist ESG investing over antitrust, consumer protection and discrimination concerns.”
There is reason to believe it. Investors didn’t yank their money from all funds: US$17-billion flowed into the full slate of U.S. open-end and exchange-traded funds over the same period.
In a report released on Wednesday, Greenpeace said U.S. anti-ESG sentiment is not a grass-roots groundswell rooted in desire to protect American cultural values, but a well-orchestrated campaign by fossil-fuel interests fearing divestment. The environmental group cited reporting by the New York Times showing the same organizations that bankrolled the climate-change-denial movement are pushing state treasurers to target banks and investors that restrict funding to oil and gas.
Major fund management companies that have touted ESG investing, including Blackrock Inc. BLK-N and Vanguard Group VEQT-T, are in the crosshairs of this movement. Morningstar noted that one fund, BlackRock’s iShares ESG Aware MSCI USA ETF, accounted for the bulk of the U.S. outflow. Most of that was the result of a major selloff on a single day in March.
BlackRock chief executive officer Larry Fink, who has played a big role in making ESG investing mainstream, has lately gone to pains to explain that his company is not “the environmental police” and that the oil industry has a role to play to ensure security of energy supply while also investing to lower emissions.
Will this attack on ESG spill over into Canada? So far, the trend is going in the opposite direction. Inflows into Canadian sustainable funds are nowhere near the deluge of 2021, the heyday of these types of investments. But in the first-quarter, investor money into these vehicles amounted to $1.4-billion, up 55 per cent from the previous three months.
It’s not that Canadian ESG doesn’t have its critics – but it hasn’t registered as a hot-button political issue. Premier Danielle Smith’s staunchly pro-oil government in Alberta has even given a nod to the need to get to net-zero emissions.
For many Canadian investors, sustainability still seems to be an important aspect of a diversified portfolio and an indication that fiduciary duty is being carried out, rather than fodder in a culture war.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.
Jeffrey Jones