Insider Q&A: The ESG industry on becoming a political target

Oct 17, 2022, 5:10 AM | Updated: 6:10 am

NEW YORK (AP) — After breaking into the mainstream of the investment world, ESG investing has become big enough to be a political target too.

Florida Gov. Ron DeSantis and other Republicans around the country are criticizing funds that consider environmental, social and corporate-governance issues before deciding whether to invest in a stock or a bond. They call it “woke” behavior gone amok.

For years, the ESG acronym was a term known only within the investment world. Supporters say using such a lens to scrutinize potential investments can uncover risky companies with stock prices that are too high, or reveal investment opportunities underappreciated by Wall Street.

Lisa Woll is the CEO of US SIF, an industry group advocating sustainable investing whose members control $5 trillion in assets under management or advisement. Woll, who will be stepping down in early 2023, spoke with The Associated Press about ESG becoming a political football. The interview has been edited for clarity and length.

Q: Are you surprised ESG has become such a hot-button political issue?

A: We were surprised. I think it’s one of those things where one politician said it, and it started a snowball effect.

Q: What is the bigger threat: states pulling their pension funds’ money out of ESG-aligned funds, or the knock-on effect of regular investors following suit?

A: If pension funds start to pull out of any fund that could be seen as using ESG criteria, that’s a much bigger impact than individual investors choosing not to put money into these funds. That’s just a far bigger pool of money potentially.

Q: How worried is the industry?

A: We just had our conference in June, when both “greenwashing” (allegations of some funds having weaker commitments to ESG than advertised) and this political pushback were in full blossom. We had many conversations on this.

You would think the funds themselves would be very concerned about this. In a way, I think it had the opposite effect.

It says the field is big enough, concern about climate change and human rights and workers’ rights is big enough, that someone is worried about it. It’s one way of advancing change, and clearly this pushback is a way of not having those kinds of changes.

Q: Is there any talk in the industry about dropping the ESG term, given how political it has become, and using a new name?

A: Many of our members don’t use that terminology (ESG). We generally don’t use that. We say, “Sustainable investing is a usage of ESG criteria.”

We prefer that term because we think it’s much more meaningful. Would the average person know what ESG stands for? “Sustainable” at least gives you a sense of the end objective that ESG doesn’t unless you’re a wonk and actually know what those terms mean.

Q: Do you see any risk of funds dropping their commitment to ESG given all the political anger?

A: “Any risk” is hard to say. That could mean a couple asset managers or a couple asset owners. Looking down a path 10 years from now, no. That’s not to say there won’t be a small percentage that did something, maybe somebody who entered last year. But at a scale that would be meaningful, I just can’t see it.

Q: What’s the ultimate goal of ESG or sustainable investing? Is it a social one, or purely financial where you’re looking for the best returns?

A: The truth is there are different motivations for it. I think there are investors who utilize ESG criteria because they want to better understand risk and opportunities.

And you have other investors who really want to advance important issues to them. That’s where the field began, with socially responsible investing.

Q: Has ESG always been a divisive topic within the investment community itself?

A: When I got to US SIF 16 years ago, and probably for the first five or six or seven years, a lot of my time was spent defending the field, that it was not a niche or a fad or a bunch of hippies.

Now that’s very much not the conversation. Now it’s how the field is so big.

Q: Does the fast growth for sustainable investing remind you of anything else?

A: Organics. That was totally niche. You had to go to the co-op, and you had to spend three times as much. It had the same throwback to the 60s that sustainable investing had way back in the day. Now people assume they’re going to have access to organic products. They assume when they go into the grocery store, no matter where they are, they will have access to organic products.

Q: Do you see ESG remaining a hot-button topic?

A: It’s so hard to say. Clearly it is a discussion point. I think in a way, maybe even with the anti-ESG, maybe we’re educating some new adherents because they’re going to learn about it for the first time.

In a lot of these states, there’s not a lot of coverage on ESG. Maybe the anti-ESG crowd is educating a whole new generation about it.

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Insider Q&A: The ESG industry on becoming a political target