The so-called ESG backlash stems from efforts across some U.S. states starting last year to discourage — and in some cases prevent — public pension funds from taking ESG factors into their investment strategies. Efforts have included banning some financial companies including BlackRock from manager allocations, to passing resolutions such that plan executives cannot include ESG considerations in investment decisions.
Other U.S. plans and states are pushing for fossil-fuel divestment, and in Europe and the U.K., meanwhile, taking ESG into consideration is an accepted — if not expected — approach for managers to take.
"Most firms are thinking in more cautious terms on this given what's happened," with a specific example of the more cautious approach to the overall sustainability narrative and the decisions by some to leave the Net Zero Asset Managers initiative, said Richard Bruyere, managing partner at asset management strategy consultant Indefi.
"The priority for managers today is to be extremely specific as to exactly what they are doing and trying to achieve, and not be deceptive to clients," Bruyere added.
So, what's a global money manager to do? The answer seems to be to ensure their messaging and intentions are airtight when it comes to defining ESG and its application to strategies.
"At PGIM, we set out very clearly from the beginning that we do not see ESG as an investment philosophy, investment style or an investment product," Unanyants-Jackson said. "What we are saying is ESG is a tool, and we can use that toolkit that we have to identify material risks arising from ESG factors and potentially the opportunities that are arising from large societal trends," such as decarbonization and gender equality. The firm also has clients that want to invest in line with their values, and then PGIM is also developing capabilities for a smaller cohort of investors that want to achieve real-world impact. "Incorporating values and impact objectives may not be aligned with fiduciary considerations, so to do that, we need a mandate from the client," Unanyants-Jackson added.
But she's clear that, "when it comes to fiduciary duty, it is non-negotiable. If climate risk is a material risk for the company, we can't ignore it. If we know this is really going to potentially negatively impact the financial returns, we have to incorporate it — we do this across all strategies and major asset classes," she said.
That approach has not changed, but "there is so much scrutiny, we are looking at how we communicate about what we do on ESG. Sometimes … you think everyone understands what you mean, and then you realize that's not the case at all. So, we are refining our messaging … (we are) doing it through our website communication, publishing an ESG report, thinking very heavily about clarity of message," Unanyants-Jackson said.
Client communications, for example, include an explanation of what ESG means to PGIM.
"We are reviewing materials to make sure we are concrete, and there is as little room for interpretation — or misinterpretation — as possible," she said. "And that's not just because of the U.S.," but also because of Europe's Sustainable Finance Disclosure Regulation, which asks managers to clearly define risk and opportunities and environmental and social characteristics and preferences. PGIM has $1.27 trillion in assets under management.
Schroders hasn't changed the way executives talk to clients in terms of "consistency of messaging," Severinovsky said. "What we have done, however, is listen to our clients, and be thoughtful about bringing sustainability messages and investment solutions to them that we believe will resonate with their interests and objectives," such as research on human capital management — an important topic for U.S. investors, she said.
Just as PGIM has, Schroders has also "undertaken an effort to review marketing material, website and fund prospectuses to ensure consistency, clarity and transparency of disclosure, as well as sustainability definitions and categorizations," Severinovsky added. Those efforts have included developing both corporate and investment capabilities brochures and content on the website, which detail the firm's integrated, sustainable and impact strategies, as well as summaries of Schroders' approach to integration, tools and data, and its engagement activities.
"In light of increased attention from different stakeholders, we believe that our reporting should be more frequent and more accessible, in order to ensure that our clients have the information they need to evaluate our efforts," she added. Schroders has $923.1 billion assets under management.
Other money managers said they haven't made any changes to their approach or communications. One head of marketing and communications at a global money manager said the firm doesn't really make big, ESG-related statements, "and we have been very conscious of language we use for some time."
However, Indefi's Bruyere has seen a change in managers operating in the U.S. "In the U.S., what we tend to observe is firms trying to adopt a neutral approach toward ESG — very business-focused. This would not necessarily fly in Europe, not necessarily be enough, but that neutrality is a big bet on an ability to work across states — whether they are red or blue," he said.