Since when did investment firms become our moral arbiters? If your pension savings are made available to asset managers, do you think that their priority should be to enhance investment returns or to allocate capital based on stakeholder principles?
As with most contentious issues, it rather depends on who you ask. In a 2019 interview with the Financial Times, Warren Buffett said that it wasn’t the responsibility of corporations to impose their worldview on society. That appears to be at odds with the stance adopted by Larry Fink, chairman and chief executive of BlackRock (US:BLK), who takes the view that “access to capital is not a right. It is a privilege”. Which begs the question: whose capital is he referring to? The BlackRock head also warned that corporate “behaviours are going to have to change, and this is one thing we are asking companies; you have to force behaviours and at BlackRock we are forcing behaviours”. Whether this falls into line with his fiduciary responsibilities is open to question, but there’s no doubt BlackRock executives can put forward a persuasive argument for behavioural modification with $8.6tn (£6.9tn) in assets under management (AuM).
Some argue that the growing influence of environmental, social and governance (ESG) mandates is an expression of free markets responding to investor demand. A view also exists that the pursuit of stakeholder principles and enhanced shareholder returns are not mutually exclusive. Indeed, it’s logical to assume that the wider impact of externalities such as climate change could have a detrimental effect on the trading performance of individual companies over time. It’s a reasonable determination. The reality is, however, that while it’s certainly possible to align the pursuit of profit with ESG principles, if the latter is too narrowly focused it can hamper the ability of companies to generate long-term value for their investors, particularly if it alienates the customer base in the process, as we’ve seen with recent high-profile consumer rebellions in the US.
A theory runs that the very existence of asset managers with such massive capital pools distorts market pricing if they are overly reliant on passive investment strategies. Supporters argue that less information is being incorporated into prices within these types of investments, so general capital flows, rather than fundamental analysis, hold sway in the market. It also flies in the face of the efficient market hypotheses. The trouble is that if ESG mandates are overly rigid they, too, hamper the valuation process and distort capital allocations, particularly if they incorporate proscriptive limitations, or nebulous provisions linked to ‘social justice’.
These potential pitfalls haven’t gone unnoticed in the marketplace. In December, Vanguard withdrew from the Net Zero Asset Managers initiative, an alliance that uses its investment portfolios to reduce greenhouse gas emissions. The US investment group, a proponent of low-cost tracker funds, has resisted calls from environmental bodies to tailor its investments in support of decarbonisation policies. The group closed out 2022 with $8.1tn in AuM, and even though it will be difficult to quantify whether the move has any discernible effect on inward capital flows, it’s likely that the dollar figure will draw the attention of the asset management industry.
The issue of sustainable mandates has attracted more attention in the US of late. Vivek Ramaswamy, an outspoken critic of ESG policies, is one of the candidates in the 2024 Republican Party presidential primaries. Ramaswamy came to prominence as a biopharmaceutical entrepreneur, but he is also the co-founder of Strive Asset Management, an investment firm designed to “unapologetically” prioritise the financial interests of its clients over other stakeholders.
While it’s highly unlikely that Ramaswamy will secure the nomination of the Republican Party, the two frontrunners in the race – Donald Trump and Florida governor Ron DeSantis – share a similar disdain for these policies. Indeed, DeSantis has signed into law a bill that prohibits state officials in Florida from investing public money to achieve ESG goals, including the issuance of related bonds.
He is one of several Republican state governors to prohibit or restrict capital allocations of public money, thereby reducing the influence of chief investment officers of state pension funds. Additionally, the US Congress recently voted to overturn a Biden administration rule that would permit pension fund managers to consider ESG goals in investing – the president duly moved to veto this.
Opposition to sustainable mandates has an obvious political dimension, but there are other reasons why they’re being brought into question. The US Securities and Exchange Commission is now taking aim at companies engaged in ‘greenwashing’, as it has become increasingly difficult to discern what constitutes a genuine ESG fund – and therefore genuine investment returns. The latter point is critical given the degree of UK retail investor exposure.
