PRI in Person: anti-ESG sentiments weigh heavily on investors’ minds

The global net zero investment community has descended onto the Japanese capital of Tokyo this week, as the Principles for Responsible Investment (PRI), the UN-backed coalition that pushes for green standards in investment strategies, is holding its annual conference in Japan, PRI in Person.

Yesterday, during day one, Japanese Prime Minister Fumio Kishida urged investors to step up their climate allocations and one of the country's biggest asset owners, Nippon Life Insurance, said pension funds should brace themselves for more and stricter regulation.

Despite the fairly upbeat mood and optimistic outlook among most investors present at the event, with a general belief responsible investment policies are gaining momentum and ESG is here to stay, dark clouds are gathering over the climate finance community, however. 

This is because the strong anti-ESG wind that is blowing through large parts of the world's biggest investment market can no longer be ignored. 

In fact, the issue is without a doubt one of the most-talked about topics at this week's conference.

While some keynote speakers and panellists at the event downplayed the significance of sustainability principles finding themselves subject to sustained and direct attacks, dismissing the sentiments as temporary political issues, the mood on the ground seems to be somewhat different.

In practically every conversation and discussion Net Zero Investor had so far at the event this week, investors are curious to hear what this publication makes of the anti-ESG backlash, "is black really the new green?"

While sustainable investment principles are increasingly taken on board by institutional investors and asset managers, amid a raft of voluntary and mandatory disclosure requirements.

But this week's conference theme - 'moving from commitments to action' - is increasingly overshadowed by the fact that some of the largest players and most influential policymakers are not prepared to take the next net zero step.

One U.S.-based asset manager shared with Net Zero Investor his firm no longer includes ESG or sustainability in any of its brochures, websites or other correspondence.

"We do not mention it anymore, we don't actively bring up ESG, not before we read the mood of the investor, before we understand their profile and wishes, it puts people off."

Some asset owners, however, see a silver lining as the anti-sustainability approach some managers take simply helps investors to spot their true colours.

Industry veteran Sharon Hendricks, since 2011 a board member of The California State Teachers’ Retirement System (CalSTRS), the largest educator-only pension fund in the world, and the second largest pension fund in the U.S. with $315 billion in assets under management, "the anti-ESG backlash is really dividing those who do the work, and those who do not, and that's not necessarily a negative."

Elaborating on this, Hendricks explained that "as asset owner, [anti-ESG] helps us, it is sort of self sorting out. I almost see it as a positive in a way, which is hard to believe but at CalSTRS, it helps us to see, it reveals who do the [ESG] work, and who do not. There are some positives, although I appreciate there are many challenges."

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What is undeniable is that the anti-ESG movement is no longer an empty threat: concrete measures and specific proposals have entered into Republican-held state legislatures across the US.

Nathan Fabian, PRI's chief responsible investment Officer, pointed out there have been dozens of legislative proposals in the U.S. that complicate the rollout and implementation of green investment standards.

"The people who are on the receiving end of this are states, governments, banks, managers, investors. I am sure there are investment managers probably at this event who lost mandates, and have had their professionalism criticised in public," Fabian said, adding that "we have had investment banks who were excluded and blacklisted. We have had proxy advisors for the way they recommended ESG proposals."

Fabian continued by saying that "this is now becoming quite a large group of targets, and we need to recognise that many of their questions and surveys do not appear to be constructive, they are designed to disrupt, and it is possible this is intentional, so we have a campaign on our hands."

The anti-ESG rhetoric in the U.S. does leave some European delegates at the PRI conference puzzled.

"I just don't get it, at the end of the day sustainability is about money, making portfolios future-proof, minimising risks, identifying climate risks," said the representative of a central bank in Europe, which is also one of the country's largest asset owners, during a conversation on the side-lines of the event.

"Why would you be against that? Why would anyone be against managing money well?"

She pointed out that investors and managers in Europe "would not get away with that rhetoric" as she recalled the "absurd case", last year, regarding the ostensibly ESG-friendly Federated Hermes. 

The firm faced fierce criticism from Danish pension funds and activist groups for having previously been a “gold sponsor” of the US-based State Financial Officers Foundation (SFOF), which has “educating Americans on the dangers of ESG” as its motto. 

While the company never commented on the affair, it has since withdrawn any affiliation with the SFOF.

Investment decisions

The direct impact oof the anti-ESG movement on responsible investment decisions is less than clear cut, though the largest asset managers in the U.S. have appeared ready to be tempering some of their environmental credentials.

The move by Vanguard to abandon the Net Zero Asset Managers Initiative has not gone unnoticed among delegates in Tokyo.

As a result, some asset owners scrutinise managers' profiles more in-depth before working with them, explained Anna Foller, head of sustainability at the SEK 45.2 billion Swedish pension fund AP6.

She told Net Zero Investor at the PRI conference that "we invest in the US only invest with managers that have a defined approach to responsible investment and integration of ESG, with an ambition to strengthen process and targets over time."

Foller added that: "For AP6, integration of ESG is an additional way of identifying risks and opportunities that can impact our returns. For us it is an evident part of our fiduciary duty."

She added: "So, for the US-based funds that we invest with, ESG is a means to harness additional possibilities, a means to support companies in remaining relevant for their consumers and customers, let alone for mere survival in a market where behaviours, business models and availability of resources are changing. That said, U.S. firms need to navigate the anti-ESG debate and the legal environment that they operate in."#

Hendricks, meanwhile, said that the anti-ESG sentiments do not impact CALSTRS' investment decisions.

"Sure, we read the news and newspapers, but our main focus is that Sacramento teachers have a secure retirement. That is our ultimate focus," she explained.

"Every time we go into that boardroom it's with that in mind and, as you know, people live longer. California teachers get very old. We have over 400 teachers over a hundred years old, it must be something in the water, clean living."

Regulation

Meanwhile, comments by BlackRock chief executive Larry Fink, who stated a belief that it is regulators and not investors that should be driving the transition seem to enjoy some degree of support among some asset owners at the PRI event, even though the spirit in which his comments were made may not be agreed with.

Yesterday, the CEO of one of Japan's largest asset owners, Nippon Life Insurance, indicated regulation would be the most logical tool to drive investors towards greener allocations.

Hiroshi Shimizu indicated pension funds, insurance firms and other investors should be prepared to accept stricter regulation in order to force them to invest more in green assets, primarily to accelerate the decarbonisation drive.

Shimizu, since 2018 the CEO of the $270 billion investment giant, said asset owners have a responsibility to act.

Unlike most other speakers, he confronted the anti-ESG movement head on.

"We have to fulfil our responsibility to assess the climate risks in our portfolios, and our exposures," Shimizu told delegates.

Moreover, rather than moving away from climate-focussed strategies, "it is essential for stakeholders and others to deepen their understanding of the different risks and our environmental surroundings, particularly in emerging economies, including Asia."

His call came only a few weeks after his company banned investments in nuclear weapon firms and tobacco.

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