When it comes to ESG, fund managers damned if they do and damned if they don’t

Intensifying political polarization over the role of ESG in asset management represents a rising risk for fund managers, according to Moody’s Investors Service.

In a new report, the rating agency said ESG investing is increasingly a source of political conflict in the U.S., posing a strategic challenge to asset managers caught in the middle.

“Although many asset managers view this environmental focus in investments as key to long-term returns, government officials in a growing number of U.S. states view the approach as inconsistent with the asset managers’ fiduciary responsibility, and say it may violate antitrust laws,” Moody’s said.

For instance, it reported that 27 U.S. states, representing 35% of total public pension assets, have recently taken action to oppose ESG investment, including passing laws to ban asset managers that have committed to lowering emissions from managing state pension funds.

This pushback comes in the face of asset managers’ increasing committment to net zero carbon emissions, joining global initiatives such as Climate Action 100+ and the Net Zero Asset Managers to help pursue that objective, and pushing portfolio companies to take action.

For some time, asset managers have been expanding their ESG product lineups.

A number of U.S. states also support ESG investing: Moody’s reported that 18 states, which account for 55% of public pension assets, have taken action that favours ESG investing.

These conflicting ideological trends represent a strategic complication for fund managers, a growing business risk, and a rising credit risk, Moody’s said.

“The most obvious credit risk to asset managers from the actions being taken in certain states prohibiting the incorporation of ESG considerations in investment decisions is the loss of markets,” the report said, and this threatens to create legal risks that could also lead to reputational damage.

At the same time, the states that favour ESG investing pose a similar credit risk, as they could “potentially take issue” with asset managers that try to mollify the states opposing ESG investing, Moody’s noted.

“Asset managers could lose access to public pension business in these states and suffer bad publicity and reputational damage as well,” it said.

Finally, the report said, “given the polarization in the U.S. around climate change, an ESG investment approach could lead to negative client reactions, putting AUM at risk beyond just the state pension assets.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.