Dive Brief:
- A new study on the impact of anti-ESG laws on financial institutions’ business operations from the United Nations-backed Principles for Responsible Investment found that such efforts could have “significant unintended consequences, fail to achieve their goals, or both.”
- The analysis found that among the anti-ESG legislation introduced, pecuniary bills — which prohibit or discourage state fund managers from considering non-pecuniary factors when making investment decisions — in particular, creates ambiguity. This lack of clarity around proposed restrictions challenges investment managers operating under fiduciary standards, per the study. Meanwhile, boycott bills — legislation that bars or seeks to prevent companies from boycotting certain industries due to ESG-related criteria — were seen as potentially less restrictive, with some openings for firms to do business with other products.
- The impact of anti-ESG legislative efforts “will be somewhat different depending on the nature of the legislation and of course the political climate from which they emanate,” Morris DeFeo, a partner at law firm Herrick Feinstein told ESG Dive. “These efforts could materially affect the availability of investment capital for businesses and investment vehicles that have an ESG-based focus because certain funding such as state pension accounts may be prohibited from investing in ESG-based funds or companies.”
Dive Insight:
The PRI investor network, which supports the implementation of ESG principles, interviewed more than a dozen of its U.S.-based signatories in late 2023 and early 2024 to get their views on the impact of anti-ESG laws on business operations and the extent to which the laws may meet the stated aims of their proponents.
PRI’s signatories pointed out differences in the way anti-ESG legislation was discussed with professional investment staff compared to conversations with policy makers and their teams, who “tended to repeat anti-ESG talking points but did not demonstrate an understanding of the investment process nor the practical implications of the demands they were making on managers,” according to the study.
Boycott vs. pecuniary bills
Signatories interviewed for the report offered their views on two types of bills: boycott bills and pecuniary bills. Pecuniary, in this instance, refers to factors that have a financially material impact on the financial risk or financial return, while ESG-risks are considered non-pecuniary.
Signatories expressed particular concern over bills that would exclude non-pecuniary factors when making investment decisions, particularly because the definitions of what is considered pecuniary and non-pecuniary differ by bill. Definitions of pecuniary do not always align with an understanding of the term “financially material,” making it challenging to apply in practice, the report said.
By contrast, boycott bills were seen as less concerning by signatories. An example of this is Texas’s Senate Bill 13, which requires the State Comptroller to create two separate lists of entities deemed to be engaged in an economic boycott of the Texas energy industry. These lists comprise Annex 1, which includes firms accused of boycotting the energy industry and Annex 2, which includes several hundred individual funds the state believes are boycotting the energy industry, but is unclear about their specific role as defined by Texas law. Several signatories stated that although individual funds offered by their firm were included in Texas’s Annex 2, the direct impact of such a listing has been minimal as they were able to continue doing business in Texas through other products.
Boycott bills, however, could create other obstacles for pension fund managers, according to Jamison Friedland, a sustainability analyst at AXA Investment Managers.
“Regarding some of the ‘boycott bills,’ the restriction of certain asset managers from being able to operate in these jurisdictions has artificially constrained viable investment options of pension assets potentially driving up costs,” he said.
PRI’s analysis also pointed to how anti-ESG laws also generate large volumes of additional due diligence and financial justification of regular investment activities. This has resulted in increased workloads for signatories’ legal, marketing, investment, stewardship and other internal teams. In particular, pecuniary bills add a considerable amount of required documentation — including financial analysis — that can complicate relationships with clients.
No change in investment practices
No signatory reported any change to their fundamental investment practices, since they are based on a fiduciary duty to clients. Meanwhile, use of ESG information and ESG engagement help fulfill that duty, signatories told PRI.
“At a high level, if investors are integrating ESG ‘appropriately’ then we agree with the key finding that no shift in the fundamental investment practice is necessary,” Friedland said. “Investors need to continue to provide transparency on how they define ESG and the implications that ESG integration has on their investment approaches.”
