BEN REBBECK, Executive Director

Over the last 18 months institutional investors have been struggling to grasp two conflicting forces which, if not managed well, could cause significant ramifications for how listed companies engage with and access capital. Investors desires to embed ESG standards and principles in their disclosure are in opposition to ‘anti-woke’ regulations which seek to dictate what factors institutional investors can consider when managing investments.

Screening and stewardship of investments on environmental and social matters is hardly a new concept. In many respects, investing with an eye on ESG matters has always been part of fundamental risk and return management, with professional investors looking beyond a company’s Profit and Loss Statement to identify risks and competitive advantages that will deliver investment performance.

In recent times, a confluence of global mega-trends including the rise of passive investors; challenges like climate change; an understanding of the financial and performance benefits of gender and LGTIQA diversity; and greater access to corporate information by employees and consumers to corporate behaviour, has seen an estimated one third of total global assets under management are sustainable investments.

While investment professionals view this as entirely rational and well-founded capitalist behaviour, there are also market commentators, particularly in the USA, who views its impact on capital allocation as a direct afront to long held religious or conservative beliefs.

Many politicians are alive to this sentiment and are now responding accordingly, by labelling ESG “woke”. The implication is that the global asset management industry has been hijacked by the left of politics or unreligious.

For example, Andy Barr, the chair of the US Congress’ House Financial Services Subcommittee responsible for financial institutions, claimed America’s financial system had been “co-opted by the intolerant left that is intolerant of diversity”. For the US to be economically competitive, he said “we need our financial system to provide equal access to capital to all kinds of businesses”.

In Australia, the Opposition’s shadow assistant treasurer, Stuart Robert, said that ‘superannuation funds have no business pursuing social and environmental causes’, aligning with the Institute of Public Affairs campaign to resist “woke capital”.

Framing the argument in terms of conservative or religious values, US politicians have effectively created a new battle ground, independent of the space investment managers occupy. That is, while the notion of equal access to capital flies in the face of fundamental investment principles – risk and return management reflects capitalism – it remains completely separate to the political principles eschewed. This ensures arguments of rationality by investment managers often miss the mark in the minds of those who they are seeking to persuade.

Exploiting this sentiment, 18 US state governments have either proposed or adopted legislation over the past two years restricting state business with financial institutions that use ESG criteria to direct their investments. And in a letter to Blackrock’s Larry Fink, 19 Republican state attorneys-general told the asset manager, “Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda.”

With a US Presidential Election on the horizon, it’s not just equity asset managers who are in the sights of self-declared ‘anti-woke’ state politicians. Ron DeSantis, Florida’s Republican governor and presidential contender, is proposing to require that public bodies that issue bonds would no longer be able to work with ratings agencies that value the bonds using ESG criteria, i.e. all large-rating agencies.

Reacting to the rising levels of emotion around ESG matters and to avoid becoming a target of unwelcome regulation, many large passive fund managers are now seeking to avoid using the term ‘ESG’, instead preferring to position assessment of all ethical matters as part of ‘contexting’ their analysis of long-term economic value. While this positioning does not represent a change to fundamental analysis, it is intended to avoid the argument to maintain the large passive fund managers’ fiduciary responsibility of maximising returns to their clients.

However, the risk of this approach is that it merely passes the political hot potato to listed companies, who are required to meet the ESG disclosure standards and demands of institutional investors. And for listed companies, avoiding an argument is not so simple. 70 to 90% of respondents in the 2023 Edelman Trust Barometer said they “expect CEOs to take a public stand on issues” such as climate change, discrimination, and the wealth gap.

As culture wars heat up, CEOs can find themselves easy targets — from all sides of politics. While avoiding discussion is not an option, a safe harbour for listed companies is to ensure ESG disclosures are anchored in transparent analysis of how they impact corporate performance and value, avoiding spin and greenwashing.

Echoing this approach, Australian Federal Minister for Financial Services Stephen Jones said in a speech at the Australian Council of Superannuation Investors conference in May this year, that sustainable business must start in the boardrooms and in investment decisions, not marketing departments.

At FIRST Advisers we assist our clients achieve this via ESG materiality assessments. ESG Materiality Assessments empower companies to easily report on the current state and outline future ESG initiatives while taking into consideration business goals and risks.  In turn this materiality assessment will directly link to the recently launched and soon to be mandatory IFRS sustainability reporting standards.

“Those who want to equate sustainable finance and ESG responsibilities with some form of woke capitalism need to have a good hard look at themselves,” Mr Jones said “because what we are talking about is the future value of companies.