Sustainable finance in the firing line of United States culture wars

Europe has prided itself on driving the green investment agenda via its Green Deal but across the Atlantic, strong anti-ESG (environmental, social, governance) sentiment is building. Sustainable finance has become the latest victim of the culture wars, with pressure mounting on pension funds and other institutional investors to disinvest from funds with green objectives. And as the US presidential race heats up, the issue looks set to become even more polarising.

Áine Ní Riain, senior associate with K & Gates (Ireland) has first-hand experience of the phenomenon – and she points out that it is “impossible” for European markets to ignore any shift in US investor sentiment.

“I was recently engaged to work alongside a number of my US colleagues in conducting an analysis for a US state pension organisation,” she says. “The state in question had passed a law specifying that state funds could not be invested with the purpose of furthering social, political or ideological interests and requiring that all investments be based purely on financial risk and return considerations only.”

Negotiating this stipulation was challenging, says Ní Riain. While for funds classed as coming under Article 9 of the EU’s Sustainable Finance Disclosures Regulation adherence was relatively straightforward, Article 8 funds, which have lower sustainability-related focus, proved trickier.

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“It was a more complex analysis, with issues being presented as to whether mere reporting on the non-financial aspects of investments brought these holdings within the scope of the ban,” says Ní Riain. “Even where these reports were essentially saying, ‘We are actually doing absolutely no good for the environment’, for example, there was concern that the act of reporting might offend the new state rules.”

In terms of this having a tangible impact on holdings in European funds, Ní Riain says financial markets globally have always been dynamic but investor behaviour and attitude is central to their workings.

“There is no doubt that we have seen a recent cooling in enthusiasm for European ESG products but that is not necessarily attributable to an anti-ESG attitude shift,” she says.

However, Ní Riain does believe there will be an impact; it is just difficult to predict its extent at this point, she says.

“In terms of the European Green Deal – and this is reflective of sustainability initiatives outside of the EU also – sustainable finance is pivotal to its success in Europe,” she explains. “And sustainable finance’s success is dependent on its ability to channel private investment into the transition to a climate-neutral and sustainable economy. This simply cannot be achieved without the will of investors.”

Less concerned about the global impact is Ciarán Hughes, director of Ethico, a financial adviser and broker specialising in sustainable investments. He says the“backlash” in the US against ESG will not have a significant impact on global markets.

“It is a storm in a teacup,” he insists. “Overall, there is one direction of travel with investing and that is towards sustainability in the long run.”

It is worth noting that most of the hundreds of pieces of anti-ESG legislation proposed in different US states are facing significant opposition.

According to Hughes, this “relatively insignificant pushback” is born out of a fundamental lack of understanding of what ESG is and what it aims to achieve.

“At its core, ESG investing is about protecting the investor against negative outcomes from badly run companies,” he explains. “It is essentially about saving yourself, not necessarily about saving the world – it is just a happy coincidence that it can do both at the same time.”

Yet Hughes admits he is “somewhat sympathetic” to investors who genuinely feel they are being hijacked into investing sustainably without being consulted.

“Investment managers are simply facilitators of client instructions,” he says. “They should offer traditional funds and sustainable funds and allow investors to choose.

“Compare on returns, compare on charges, compare on impact. Once investors realise that there are no downsides and that sustainable investing is the better choice, then the free market will push investors and capital further towards sustainability. It’s a no-brainer.”

Ultimately Hughes believes that people can have a positive impact while maximising their returns but they should be empowered to choose that path for themselves.

“The important aspect is choice – or even freedom, as our American friends would say.”