Managers pressing pause on ESG amid regulatory concerns

KPMG says nearly half of asset managers intend to postpone present ESG strategies

Managers pressing pause on ESG amid regulatory concerns

Environmental, social, and governance strategies are being put on hold by asset managers.

According to KPMG's 2022 U.S. survey as reported on Institutional Investor, 48% of CEOs of asset management companies intend to halt or reevaluate their ESG initiatives within the next six months. One-third of the CEOs claimed to have done so already.

The findings were based on a poll of 81 CEOs of asset management companies, the majority of whom work for private equity firms, hedge funds, real estate investment funds, and other alternative asset managers. They covered the regions of North America, Europe, and the Asia-Pacific.

The survey was conducted between July 12 and August 24.

Asset managers are currently seeing resistance from lawmakers in U.S. Republican states, which is contributing to the growing skepticism regarding ESG initiatives.

Recently, legislators in Florida, West Virginia, Utah, Minnesota, Louisiana, and Arizona proposed anti-ESG legislation that may bar state institutions from cooperating with managers who take ESG considerations into account when making investment decisions.

ESG managers are also feeling more scrutiny from the U.S. Securities and Exchange Commission now.

According to a new proposal advanced by the regulator, investors would be required to disclose the ESG factors used for each ESG-labeled investment strategy, as well as the use of third-party ratings, to prevent misleading or deceptive ESG fund names, such as "ESG-focused funds," "integration funds," and "impact funds."

Read more: BlackRock pushes back against watchdog's ESG disclosure proposals

The KPMG poll found that one of the major obstacles to implementing managers' ESG plans was the rapidly changing legislation.

Furthermore, issues surrounding ESG are becoming more complicated due to more than simply American political conflicts.

Asset managers also deal with differing opinions on ESG across various nations, according to Sean McKee, national practice leader of public investment management at KPMG.

“What the U.K. and the U.S. think, even if they are aligned, may not be perfectly [the same] in terms of the extent of regulation,” he said. He added that a lot of U.S. asset managers have significant overseas operations and must have a global perspective when implementing their ESG policies.

Read more: Institutions' ESG-related AUM to surge 84% by 2026 says PwC

Disruption and regulatory uncertainty are driving asset managers to remove ESG from their strategic priorities. Ninety-one per cent of asset management CEOs agree that there will be a recession in the next 12 months. The top two steps that chief executives plan to take in preparation for the anticipated recession are to pause their ESG efforts and downsize their employee base.

“Some challenges are more present and clearer than others,” McKee said. Furthermore, it makes sense for certain asset managers to put an emphasis on getting ready for a coming recession rather than long-term ESG objectives.

McKee asserts that just because managers are halting their ESG plans doesn't mean they will completely give them up. Some managers simply need "clarity to understand what the challenge really is," the author said in his conclusion.