With a harsher policy and regulatory ecosystem surrounding sustainable investing, asset owners and money managers are expected to move to placing a greater emphasis on returns over the impact of their investing, experts said.
However, they also said investors that have embraced sustainable investing will stay the course. That's despite the belief that the new Trump administration will take a much tougher stance on ESG investing than the Biden administration.
That belief — and Republicans’ push for a rollback of Biden-era policies — was reflected in a Jan. 28 letter from 22 Republican state financial officials to Vince Micone, acting labor secretary, and Acting SEC Chair Mark Uyeda calling on the Securities and Exchange Commission and Department of Labor to issue new guidance and rules to restrict environmental, social and governance investing options for asset owners and money managers.
Kirsten Spalding, vice president, investor network at sustainable investing advocacy organization Ceres, said in an interview that the long-term focus of asset owners means the institutional investing industry will see few changes as a result of current policy and regulatory changes.
“The largest asset owners are invested globally, they’re invested long term, they invest for the interests of their beneficiaries and participants,” Spalding said. “They invest according to their fiduciary duty, and given all of that, a change in the administration is not the beginning of the end of their investment strategy.”
For investors who haven't yet integrated ESG factors into their investing or are still considering doing so, she said there are compelling reasons to move forward.
“That is a matter of good data, good analytics, (understanding) mega trends, things that are going to impact demand and investors are, of course, really attuned to those things, because that’s where there’s alpha,” Spalding said. “Not only is there risk, but if you’re going to make money, you’ve got to be attuned to where the economy is going, and how you get ahead of it, so that you stand to benefit, and companies you invest in stand to benefit.”
Spalding said the demand for clean energy is real, investors can measure it and they’re going to be looking for those opportunities.
Most asset owners that have embraced sustainable investing plan to continue to do so, although political pressure has deterred some, according to a survey by Cerulli Associates released in February.
Among asset owners that have incorporated ESG considerations into their investment decision-making in the past, about one in 10 will cease to do so, according to Cerulli. Among that population, 34% said responding to the backlash was time-consuming and costly, 24% feared litigation and 14% said they felt pressure from stakeholders.
Michele Giuditta, director, institutional at Cerulli Associates and lead author of the research report, said in an interview that no money managers currently incorporating ESG considerations planned to stop doing so, but messaging is a considerable concern given political pressure.
“A lot of them — 42% — said that they were going to be more cautious around the messaging for these activities, and a small percentage — 4% — said they would stop offering product now,” Giuditta said.
'Container approach'
Maulik Doshi, managing director at Steward Redqueen USA, a sustainability and impact consulting firm, said in an interview that given the anti-ESG rhetoric, asset owners and money managers are getting much more focused on financial returns as their primary mission in investment decision-making.
“We’re starting to see governmental pensions and others say that we need to make financial returns the principal guidelines, and so the dual mission (returns and ESG), it’s starting to become less of a focus,” Doshi said, “and that’s not to say that everybody’s just throwing out the baby with the bathwater, but that the principal North Star for the investment-decision process is around financial returns.”
Doshi said the biggest challenges that he’s seen with ESG, especially in the U.S., is what he calls the container approach to investing, in which all kinds of values and political perspectives become the determinants of investment success along with financial returns.
“That container approach, whether you believe in positive climate investment decision-making or social impact decision-making or a DEI-related focused areas in the governance process, all of those things became conflated to a single approach and that obviously caught fire as part of this,” Doshi said.
Doshi said he is talking to his clients about focusing on the creation of new and innovative products with the principal guidelines of financial returns being the “North Star,” but that can achieve elements of sustainability and impact as well. He also mentioned that his real economy clients, such as energy companies and consumer product manufacturers, will continue to invest opportunistically in climate transition-related strategies.
“With the world balancing out focus between what’s renewable and what’s traditional in terms of energy, I think that that’s going to be part of their operating infrastructure (and) their supply chain. All of that’s going to be a part of it,” Doshi said.
He noted that climate transition investments are long-term investments and many have already been made.
Managers have "already seen those shifts of sales, and they’re accruing significant revenue on these things, so we think that these investments aren’t really going anywhere,” Doshi said. “These companies are really in the space of making sure they’re making these strategic investments the right way.”
Legal uncertainty
Cerulli Associates’ Giuditta said that the biggest change since her firm conducted the survey in late 2024 is a now-uncertain legal environment. She said her firm’s advice to asset owners is to really be explicit about how their ESG data is helping returns.
“Just have the data to back it and show how ESG data has helped them better assess the risk/return profile of investments,” Giuditta said.
The potential legal complications that asset owners fear on the federal level harkens back to the flurry of legal and legislative attempts in Republican-led states to squelch ESG investing. What the laws actually forbid has not always been clear, and legal battles have erupted in states like Oklahoma.
Meanwhile, the fate of ESG-related investments in states that have passed so-called “anti-ESG” laws has been mixed. In Florida, for example, a measure that appeared to ban ESG-related investments did not actually do so.
In May 2023, Florida Gov. Ron DeSantis signed a law requiring public entities in the state to make investment decisions based "solely on pecuniary factors" and not include environmental, social and governance considerations. However, the law does not appear to prevent entities from actually making investments in strategies that adopted those considerations.
For example, the pension and investment committee of Broward Health, a Fort Lauderdale, Fla.-based hospital system, discussed at its meeting the month after DeSantis signed the law whether it would have to terminate its pension and operating funds' investments in State Street Global Advisors' SSGA S&P 500 ex-Tobacco Index Fund and move the assets to the SSGA S&P 500 Index Fund.
A memo included with the June 28, 2023 pension and investment committee agenda materials said "both the pension (approximately $400 million) and unrestricted funds include a large-cap equity index fund, SSGA S&P 500 excluding Tobacco. At the time this investment was selected, the committee may have considered non-pecuniary factors. Therefore, the committee should consider a replacement fund, such as the SSGA S&P 500 index fund, at the June Pension and Investment Committee meeting."
However, according to a hospital system spokesperson, the system’s board of trustees voted on Aug. 30, 2023, to retain the investments in the ex-Tobacco fund because its investment returns equaled or exceeded those of the SSGA S&P 500 index fund in the trailing, one-year, three-year, five-year and seven-year periods.
Similarly, it was a about one month after the passage of the law that the Florida State Board of Administration, Tallahassee, announced it had committed $200 million is to Blackstone Green Private Credit Fund III, the latest in Blackstone's series of green-energy credit funds.
In a statement, an SBA spokesperson said: “As a fiduciary, the SBA has always and continues to invest focused solely on maximizing returns, managing risk, defraying reasonable costs, and diversifying investments for the exclusive pecuniary benefit of FRS beneficiaries.”
A number of asset owners declined to be interviewed for the story, including the $533.4 billion California Public Employees’ Retirement System, Sacramento.
A spokesperson for the second largest U.S. pension fund, the $349.7 billion California State Teachers’ Retirement System, West Sacramento, said the pension fund has a “fiduciary duty to protect the best interests of our members and beneficiaries by ensuring our portfolio’s long-term financial success.”
“We vote our proxies, engage companies and collaborate with partners to encourage sound governance practices and enhance lasting market performance and shareholder value,” the spokesperson said. “We have not made any changes to our voting practices and continue to vote in accordance with our corporate governance principles.”
One U.S. retirement plan executive who asked not to be named said their pension fund has never adopted any form of ESG policy and has taken the view “that retirement trust funds are for the exclusive benefit of the trust, and not designed to change the world.”
“Our separate account managers' contracts list the managers as fiduciaries to the fund, so risk-adjusted performance is their exclusive mission,” the executive said. “To the extent that they will make the world a better place — without sacrificing returns or increasing investment risk — we wouldn’t have a problem with that. So I don’t expect Trump policies regarding ESG, and particularly DEI ending, will have any effect on (our pension fund).”
For those asset owners who do have ESG and DEI policies, the executive said they may experience growing pressure from their boards and/or stakeholders to dismantle existing programs they philosophically support.
Ultimately, however, “pension funds in the U.S. will also fall along personal political lines of those of their investment people, administrators, and stakeholders. Those supporting DEI will still likely come up with workarounds to keep doing what they are doing," the executive said.
A dispassionate decision
Marcus Frampton, chief investment officer of the $80.8 billion Alaska Permanent Fund Corp., Juneau, said changes in policy and regulations associated with ESG investments haven’t affected their organization in the past and shouldn’t do so going forward.
“We’ve been successful to-date in getting our stakeholders on board with an approach where we assess investment merits dispassionately,” Frampton said. “This has served us well as it gave us flexibility to lean into the oil and gas sector at the height of its unpopularity around 2020-2021 and enabled us to patiently trade out of Russian securities or hold when holding made sense following the Ukraine invasion.”
“APFC doesn’t have any formal ESG policy, just a mandate to maximize return within our board’s articulated risk appetite,” he said.
Regardless of whether asset owners have ESG-related policies or not, Ceres’ Spalding said moving ahead, asset owners have to have really “robust dialogues with their managers.”
“They have to make sure they understand how the manager is approaching a full range of risks, including environmental, social and governance risks,” Spalding said. “They've got to be working directly with their managers to be sure that those managers are looking for the mega trends, including climate thematics, but other mega trends around inflation, all of the things they normally ask.”
“In the face of the uncertainty and the attacks that are coming at the state (level), the relationship for asset owners with their managers becomes ever more critical. They got to be asking all the questions. They’ve got to write into their mandates their expectations, and at least that's what I'm hearing from the owners and the managers.”
For the next phase of work, Spalding said there is going to be less work on getting together to join global initiatives and making statements about investing responsibly, and instead, “let's get down portfolio by portfolio and say what really matters to creating good value for our beneficiaries.”
