Last week’s ruling by US District Court Judge Reed O’Connor sure stirred things up in the ESG world. Not only because of the court’s ruling, but also because of the logic and (mis)interpretation of the facts by the Judge. Matt Levine analyzes and questions the ruling at length and I recommend you read his article, but to sum it up in two sentences:
- Judge O’Connor “defines ESG to mean caring about environmental, social or governance factors for reasons other than trying to improve returns to investors” rather than considering “ESG factors because you think that they are material to long-term risk-adjusted financial returns.”
- The Judge cited no instances within American’s program where ESG factors were applied or considered. American’s funds weren’t specifically ESG funds – the judge ruled that because BlackRock claimed to consider ESG factors in their overall investment philosophy across the board, that was enough.
Levine said “I think virtually 100% of ESG investors would disagree with” the Judge’s definition of ESG investing. My view – it really depends on the individual “ESG investor” and how genuine their intentions in using ESG factors – I think greenwashing is still a thing in the investment world. The reality is somewhere in between Levine and Judge O’Connor. State laws/lawsuits aren’t helping.
For instance, when index fund owners pressured pressured coal companies to cut their production based on climate risk concerns, the State of Texas sued the companies for violating anti-trust laws because the reduced supply “produced cartel-level profits” – so ESG is good for profits. Yet Texas and several other states passed laws or targeted financial services firms for using ESG considerations to boycott fossil fuel energy companies, arguing that doing so artificially reduces investor returns – so ESG is bad for profits.
“There’s no obligation for the anti-ESG movement to be consistent,” said Levine.
The State of Maine has entered the fray. Responsible Investor wrote
“The Maine Public Employees Retirement System (MainePERS) has voiced concern about its legal requirement to divest fossil fuels by 2026. Board meeting documents published last week state that the $19.3 billion fund ‘does not believe further active divestment from fossil fuels would be in the best financial interests of members as benefit recipients’… The fund is subject to a law passed by the state legislature in 2021 which directs it to refrain from future investment in fossil fuel companies and divest any existing holdings by January 2026.”
Where does this leave us? Well, definitely in limbo with regard to certainty or consistency in legal contexts. Same thing when it comes to talking about how investors apply or consider ESG factors. However, the connective tissue in all the confusion is clearly and credibly demonstrating the financial value of ESG/sustainability initiatives – whether you are an operating company or an investor. As Judge O’Connor said:
“Simply describing an ESG consideration as a material financial consideration is not enough. There must be a sound basis for characterizing something as a financial benefit.”
Members have access to a number of resources that help to clearly and credibly demonstrate financial value of ESG/sustainability initiatives, such as our Guidebook Simplifying ESG/Sustainability Business Value, and more are on the way.
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