Some U.S. states are passing legislation to limit ESG investment despite its popularity
Canadians should be wary of a conservative backlash against environmental, social, and governance (ESG) funds since it’s already taking a toll in the U.S., warned one chief executive officer (CEO).
“ESG investing is still growing fast,” Dorrit Lowsen, co-founder and co-CEO of the Virginia-based Change Finance, told Wealth Professional. “The recent PwC report suggested that ESG assets are on pace to reach 21.5% of the total global assets under management. They are expected to grow from $18.4 trillion U.S. in 2021 to about $33.9 trillion U.S. in 2026.”
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But, even while it’s become part of mainstream investing, with more institutions getting involved and more investors willing to pay higher fees for it, Lowsen noted some Republican states in the U.S. have recently passed legislation restricting the ability of state pension funds and other state assets to be invested with assets managers interested in a net-zero commitment to fossil fuels.
“It’s dominated by Texas and Louisiana,” she said. “Texas, of course, is a big oil producing state with an economy that’s very closely connected to fossil fuels. So, I think they fear that something fundamental to their state economy is changing – and, frankly, it is, because the energy transition really is here.
“All of the economics are in place, not to mention the need to arrest climate change. So, there has been some backlash because they are trying to say that considering ESG factors violate an investment manager’s fiduciary duty. That really doesn’t hold water, particularly if ESG factors are material to performance. So, I don’t think their argument is a strong one, but it is political.”
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While she noted that the dissent was still localized in a few states, her company, a dedicated ESG manager which was founded in 2016, is waiting to see if the courts uphold the new laws. But, while she warned about similar concerns being raised in Canada, she also noted that the states doing this have targeted a small number of the world’s largest asset managers and that could impact Canadian financial advisors who are investing their clients’ funds with these managers.
“I think it’s really important to rely on data like this recent PwC report that makes it very clear that ESG is not political. It is good investment in support of fiduciary responsibility,” said Lowsen. “So, I think it’s important to have this information at hand to depoliticize your audience.”
While she called Canada “a bit of an oasis of sanity” during the recent U.S. turbulence, Lowsen warned Canadians to pay attention to these emerging trends as well as watching for greenwashing, where products may bear the ESG name, but not truly qualify.
