The ESG Joyride?

Sebastien Callebaut -

Anti-ESG Is Gaining Steam

On Tuesday, Florida Governor Ron DeSantis signed a bill that prohibits state officials from using public funds for environmental, social, and governance (ESG) initiatives, as well as ESG bond sales. This bill represents a significant effort by U.S. Republicans to counter sustainable investment efforts and is a clear political signal from DeSantis, who is expected to run for president. Republicans argue that investors and executives are becoming too focused on issues like climate change and workforce diversity, rather than returns.

"We want them to act as fiduciaries. We do not want them engaged on these ideological joyrides," Ron DeSantis
  • DeSantis stated that he wants investors to act as fiduciaries and not engage in ideological pursuits
  • While the legislation goes further than other state anti-ESG bills, there are concerns from business groups about potential financial risks

The law creates some ambiguity about how it will function in practice, such as fund managers needing to include disclaimers in communications with portfolio companies to clarify that they do not represent the views of Floridians. Failure to include sufficient disclaimers could result in regulatory action.

Need For A Better Framework

In addition to prohibiting the use of public funds for ESG initiatives, the new law in Florida also prohibits the sale of ESG bonds, which are a common way to fund renewable energy projects or reduce debt costs for borrowers who meet gender diversity or greenhouse gas emissions targets. Legal experts and credit analysts have expressed concerns that this law could prevent municipalities from accessing significant pools of ESG-mandated capital.

  • Another issue is how the terms of the law will be interpreted by officials, as it creates difficulties for rating agencies to assess environmental, social, and governance risks
  • These risks are crucial to understanding credit risk, particularly in a state like Florida that is susceptible to climate and weather-related risks, according to Thomas Torgerson, co-head of global sovereign ratings at DBRS Morningstar

Fund Greenwashing

The rapid growth of exchange-traded funds (ETFs) that use environmental, social and governance principles has raised concerns among regulators that fund managers may be engaging in "greenwashing" or making false environmental claims to attract customers. The popularity of ESG ETFs has made them a significant source of new business for asset managers as investors seek opportunities that benefit both society and their investment portfolios.

  • However, there is a wide range of ESG ETFs with different approaches, making it essential for investors to carefully research them to ensure they match their expectations
  • Meanwhile, fund managers in Europe have raised concerns about incomplete disclosures by companies regarding environmental data and changing regulatory requirements, which have made product design more challenging
  • UK regulators are taking steps to prevent the issues that have been encountered in Europe's ESG market. The Financial Conduct Authority is considering implementing new labels for sustainable investments that are more comprehensible for consumers

The regulator has also suggested limits on the use of terms like "green" and "ESG" in marketing documents for investment funds. In addition, the FCA has issued a warning to index providers in March for their contribution to greenwashing, citing widespread inadequacies in ESG disclosures.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

Photo by Feri & Tasos on Unsplash.