Regulatory policy

Recent ‘anti-ESG’ sentiments spur US policy development (with a contrasting view from the UK and a note on the Asian perspective)

Interest in ESG investing continues to garner global attention as policymakers and regulators around the world implement policies and regulations to steer or guide behavior and protect the interests of investors. a wide range of stakeholders. In this context, we see a growing questioning of so-called “woke capitalism”, especially with the recent surge in anti-ESG sentiment in the US.

In a previous blog post, we looked at a new Texas law (Tex. Gov’t Code sec. 809.051) prohibiting state investment in financial companies that “boycott” certain energy companies based on measures ESG, as well as others potentially “anti-ESG”. initiatives of lawmakers in other US states.

Recently, Florida announced a bill that would prevent public fund managers from considering ESG factors when investing public money and prohibit discriminatory practices by financial institutions based on credit score metrics. social ESG. Rather, institutions would only be allowed to invest with the goal of “maximizing financial return” (ie profit as the sole measure). Florida joins a growing list of states – including (as noted in our previous blog post above) Texas, Oklahoma, Kentucky, Ohio, Arizona, Idaho and Virginia – West – who have proposed or enacted what is termed “anti-ESG” legislation aimed at deterring or eliminating ESG considerations when investing public funds.

While the nature and scope of anti-ESG policy proposals may vary, they tend to fall into one or both of two broad categories, namely legislation that (1) targets financial institutions that “boycott » certain industries considered by the state in question to be important and (2) prohibits the use of public funds for “social investment” purposes.

Anti-ESG bills targeting financial institutions typically seek to prohibit state agencies from doing business with and/or investing state assets (usually public pension plans) with financial institutions that are seen as discriminatory in choosing not to invest in certain industries based on environmental or social considerations. concerns. These “boycott bills” most often concern financial institutions with exclusive investment policies targeting fossil fuel companies, but have also targeted institutions considered to be “boycotting” state industries such as the mining, firearms or production agriculture. These initiatives are often justified on the grounds that they reduce the support of financial institutions that indirectly harm the citizens of the state by refusing or limiting business with industries considered beneficial to the state’s economy.

In addition to the above, some boycott bills include provisions requiring entities contracting with the state to include specific representations or verifications in any contract (generally for a minimum contract value of $100,000) that the entity will not discriminate against any specific industry sought. protected by the legislation in force.

The other category of potentially anti-ESG policies proposes prohibiting the use of public funds for “social investment”. This approach often specifically prohibits the consideration of environmental or social factors in the investment of public funds, requiring instead that the sole objective of the investment be to maximize returns on investment (i.e. profits and financial performance).

According to some ESG proponents, this anti-ESG legislation has the potential to have widespread economic consequences. For example, in the context of anti-ESG oil and gas legislation, as a former US Treasury official noted, financial institution banks may feel compelled to make potentially risky loans to energy companies. for fear of retaliation from state governments with strong anti-ESG practices. legislation in place. As the former Treasury official noted, “[c]orners will be cut and, if reviewers don’t notice, it can become a financial stability issue. This won’t just happen in a big bank; it could be the same dynamic with a lot of them.

Recently, we’ve seen some financial investors attack the “stakeholder capitalism” agenda often associated with the ESG movement with an outspoken entrepreneur and investor urging some public company CEOs not to make political statements at the names of their respective companies, and to refrain from making hiring decisions based on race, gender or political beliefs. Navigating the tensions here can be tricky and we are seeing some prominent ESG-focused US asset managers face criticism from both sides of the ESG “debate”, particularly around the issue of climate change and investments in “fossil fuels”. sector.

A quick comparison with the UK

The above is in stark contrast to the current situation in the UK. It is well established that administrators of defined benefit pension plans can consider ESG factors when making an investment decision when they are financially material. Whereas, if ESG factors are non-financial factors, they can be taken into account if they do not cause financial harm (i.e. essentially used as a tiebreaker).

In recent years, there has even been some movement to allow non-financial factors to be considered in an investment decision, even where there is some element of financial harm. The English Law Commission has stated that trustees may consider non-financial factors: (i) whether they have reason to believe that plan members share a particular point of view; and (ii) their decision is unlikely to cause significant financial harm to the fund (implying that some financial harm is acceptable).

It should be noted that the UK Association of Pension Lawyers does not share the view of the Law Commission. However, with industry lobby groups, the UK government and some pension scheme members wanting UK defined benefit pension schemes to play a key role in driving ESG, it seems likely that further developments will occur in this area. This is amplified by the Financial Times which recently reported that the pensions of UK-based staff at FTSE 100 companies were linked to around 131 million tonnes of carbon emissions through investments made by their pension schemes – this could have the impact UK pension schemes can have on climate-related ESG factors.

And what about Asia?

While anti-ESG sentiment may be growing in the United States, policymakers and legislators in many key jurisdictions across Asia continue to support the development of ESG frameworks and regulations. However, ESG policy developments in Asia are evolving flexibly to meet the varied needs of economies in the region. The ASEAN Taxonomy Council has recognized the unique differences between its member states and recognized that its economic and environmental context is different from that of Europe and the United States. These differences are reflected, for example, in the green taxonomies developed by ASEAN and countries in the region. In a previous blog post, we discussed China’s first ESG disclosure guidelines that adapt ESG standards to fit the Chinese business landscape and the requirements of national laws and regulations. From a social perspective, Asian countries currently seem to be prioritizing diversity and inclusion rather than developing new regulations and guidelines on other social factors, such as human rights. While there remains a range of opinions expressed by Asia-based asset managers, there also does not appear to be any significant rebellion or challenge to this approach to ESG frameworks and regulations from asset owners. assets in the region.