Squabble between US conservatives and liberals over ESG won’t derail global trend towards more reporting, CFA Institute head says

“Right now there is a lot of noise in the US, because you have not only the federal government, but the 50 states also have a lot of say on disclosures by companies that do business in those states,” Paul Andrews, the Washington DC-based managing director for research, advocacy and standards at global investment professionals body CFA Institute, told the Post.

“There are a handful of states that are very much against disclosures on sustainability and ESG,” Andrews said. “That to me is a lot of [noise]. But if you look at the bigger picture … it is clear … [there are] more disclosures and more resources are being put into a green-energy agenda.”

Several cases have shown that pension funds of states that prohibit consideration of ESG or sustainability issues have underperformed those that did, said Andrews, a former secretary general of the International Organization of Securities Commissions.

In the US, Republican-led states on Thursday vowed to appeal a federal judge’s decision to reject their court challenge to a Biden administration rule allowing pension plans of more than 150 million people to consider ESG issues in investment decisions.

The rule adopted last year reversed a 2020 rule initiated by the administration of former president, Donald Trump, that hindered ESG investing by retirement plans.

US hardline conservatives have criticised ESG investment as a social-justice movement that exceeds asset managers’ mandates, while liberals have decried asset managers’ use of the ESG banner to conceal their inadequate response to climate change, Nomura analysts said in a report in July.

One critic of ESG investing is Aswath Damodaran, a finance professor at the Stern School of Business at New York University.

The ESG investing framework faces “a mountain of troubles” because what it tried to measure has changed over time, he said in an opinion piece published by the Financial Times last week.

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“That case worked well through much of the last decade, mostly because of ESG investors’ abhorrence of fossil fuels and embrace of technology firms, but the Russian invasion of Ukraine changed the calculus,” he said, referring to the outperformance of technology stocks over fossil-fuel shares before 2022.

“As sector funds underperformed, advocates moved on to claim that higher ESG scores lead to less risk and lower costs of capital. Perhaps because both claims are questionable, they now contend that ESG’s primary purpose is disclosure about material issues.”

For Jennifer Wu, global head of sustainable investing at JPMorgan Asset Management, investment managers’ focus has already moved beyond the politics of whether ESG investing should be pursued or not and companies’ ESG scores.

“To a great degree, ESG has been politicised, which we can’t control,” she said. “But what I find is, regardless of where our clients are located, the conversation is not so much about ESG scores, but real issues like climate change – what is a company doing to reduce emissions and adapt to extreme climate events due to global warming, and whether it is implemented at factories or across the supply chains?

“If we move away from the different definitions of ESG, the sustainable investing movement is actually making good progress, because investors are now focusing on the actual issues that impact financial return.”

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It would have been even better had HKEX concurrently proposed the adoption of a separate set of sustainability disclosure standards published by ISSB, he added.

HKEX has been working closely with various government agencies to develop a road map on adopting the ISSB sustainability-related disclosure standards, and HKEX’s proposal to first upgrade climate-related requirements aligns with the ISSB’s climate-first approach, said a spokeswoman for the bourse operator.