Money managers are struggling to adapt to an evolving political reality in which the business they covet comes with a lot of new strings attached.
A number of pension funds in northern Europe are currently reviewing whether to pull their American mandates amid concerns that asset managers in the U.S. have turned their backs on climate risk. In London, meanwhile, lawyers advising hedge funds say their clients are moving in the opposite direction, and dropping oil exclusions in order to hold on to mandates from state investors, like Texas.
The “concern is that oil screens may cause redemptions by oil-state investors,” said Lucian Firth, a partner at London-based law firm Simmons & Simmons who advises hedge funds with as much as $20 billion of assets under management. And oil states “are big investors in hedge funds.”
It’s a split-screen moment which has fund managers struggling to strike the right balance. State Street Global Advisors has already lost mandates from pension funds in the U.K. and Scandinavia after retreating from its climate commitments. And PME is currently reviewing a €5 billion mandate with BlackRock, which the Dutch pension fund says is at risk due to “BlackRock’s diminishing ambitions in responsible and sustainable investing.”
At the same time, the state pension plan in Republican-led Indiana recently replaced BlackRock with State Street, based on an assessment that BlackRock was too focused on an environmental, social and governance agenda. And the Texas Comptroller of Public Accounts is targeting financial firms it says are “boycotting” the oil and gas industry.
The developments have sent a chill through the investment management industry, with many opting to remove clear references from public documents that might place them in one camp or another. But it’s a strategy that may backfire, according to Lucie Pinson, executive director of Reclaim Finance, a French nonprofit.
“Financial institutions will need to pick a side,” she said.
Anders Schelde, the chief investment officer at AkademikerPension — a Danish pension fund known for its focus on sustainability — said it’s important for the fund that external asset managers are “aligned to some degree with how we think and how we see the world.” And in the current climate, Schelde said “the odds of a U.S. manager getting to our portfolio going forward have become lower.” The $20 billion fund just pulled a $480 million mandate from State Street.
State Street has said that as AkademikerPension does more investment management inhouse, it looks forward to continued discussions about future opportunities. BlackRock has said that it’s a “global leader” in sustainable and transition investing, and that it offers climate-focused clients in Europe a choice of products that deliver performance in line with their preferences.
As U.S. asset managers risk losing more European contracts, they remain under pressure from a newly emboldened Republican Party that’s made fighting climate policies a battle cry. Money managers face lawsuits and bans if they’re suspected of embracing environmentally friendly investments vilified by the GOP as “woke” and financially unsound.
Those political threats have coincided with a selloff in green stocks, which by one measure have lost about two-thirds of their value since the end of the pandemic. In the same period, big oil, big tech and the wider market have all rallied.
To be sure, clean-energy stocks have outperformed both big tech and the wider market so far this year, as they prove more resilient to the global selloff that just sent the S&P 500 Index into a correction.
At the same time, there’s an awareness in Europe that pulling large mandates from the biggest U.S. firms is far from risk-free. In Switzerland, lawmakers just voted to keep State Street as the custodian of a 46-billion-franc ($52 billion) pension hoard. The bill had been brought forward by a parliamentary committee in January, due to fears that the Trump administration might suddenly order State Street to freeze funds amid growing tensions between Europe and the U.S.
In the event, Interior Minister Elisabeth Baume-Schneider said the bill would have “damaged the reputation of Switzerland as a financial center,” while Kathrin Bertschy of the Green Liberals said annulling State Street’s contract would hurt the perception of legal certainty.
U.S. money managers are now navigating a political landscape in which they can be blacklisted from either side of the ESG debate. Late last year, BlackRock, Vanguard Group Inc. and State Street were all sued by a group of states led by Texas for allegedly breaking antitrust law by adopting environmental strategies that hurt the supply of coal. The suit alleges that those investment policies drove up electricity prices.
