Until recently, Federated Hermes was a darling of the sustainability world. The Pittsburgh-based fund manager of a combined $1.6tn in assets seemed a champion of environmental, social and governance goals — and its London-based team is admired for the advice it dispenses to institutional managers.
But then it emerged that Federated Hermes is also a so-called “gold sponsor” (ie funder) of the State Financial Officers Foundation. SFOF is a Republican lobby group which is campaigning to remove state pension assets from funds and companies that are hostile to fossil fuel.
Chris Donahue, its chief executive, says this contradictory stance simply reflects a desire to support “diversity of thought” in polarised times. Maybe so. But three big Danish pension funds have issued furious complaints. The halo, in other words, has cracked.
Other western companies should take note. For one thing, this case underscores how closely ESG activists are now tracking an issue that has often been (lamentably) ignored — the degree to which US companies are backing lobbyists and industry groups, and whether this tallies with their stated public position on a variety of issues. Other corporate boards should brace themselves for similar scrutiny — and potential embarrassment.
The second key point is that America is now a minefield for financial companies when it comes to ESG. Companies such as Federated Hermes are trying to square a near-impossible circle and the challenge will only get worse.
The issue at stake is that during the past couple of years there has been rising pressure on financial companies who operate in the European Union, or in liberal states such as California and New York, to embrace ESG norms. That is because investors, including big pension funds, are increasingly demanding more disclosure on issues such as carbon emissions — and using ESG ratings from entities such as MSCI to judge how to allocate money.
This has sparked a dizzying pace of growth in ESG products. But it has also caused a backlash from parts of the Republican party, who are opposed to so-called “woke” ideas and any curbs on the fossil fuel industry. One sign of this can be seen in the ESG-bashing statements from figures such as the Fox television host Tucker Carlson and former vice-president Mike Pence.
The conservative-leaning Supreme Court also ruled in June that the Environmental Protection Authority could not curb carbon emissions without specific Congressional approval. Although this EPA decision received less public attention than the court’s overturning of the right to abortion, it is crucial for business since it could also undercut the work of agencies such as the Securities and Exchange Commission.
However, the central focus for the Republican backlash is the state-level laws: politicians are seeking to curb ESG products locally. In Florida, for example, governor Ron DeSantis has lashed out against Disney over its LGBTQ policies and — more recently — told state pension funds to exclude ESG considerations from their work.
States such as Idaho and West Virginia are introducing rules that could deter their public pension funds from investing in ESG products or companies. And last week the Texas government issued a blacklist of ten financial companies that state and school pension funds are supposed to shun because the entities are deemed to boycott fossil fuel. Nine of these are European, but one is American — the mighty BlackRock.
Unsurprisingly, this has sparked furious complaints. “Trying to stop a US company from doing business in its own backyard is bad for business,” Mark McCombe, the head of BlackRock’s US business, told the FT.
In an effort to avoid being blacklisted, some US banks and asset managers are busy pointing out to Republican politicians that they are also still funding fossil fuels. Ironically, BlackRock is the single biggest investor in Texas oil and gas groups — a point that infuriates some climate activists.
But it is hard to please both the pro and anti-ESG camps. Or as one large British fund manager laments: “It looks increasingly hard to create a single strategy for the American market.” And carving out different approaches for different regions is costly and likely to spark accusations of hypocrisy — as Federated Hermes has now found.
This is distinctly depressing. In my view, it is entirely reasonable for investors and politicians to challenge the tenets of ESG, and reject some of them; the frameworks are imperfect. And it is often a strength of the US political structure that it permits plenty of local policy experiments.
But Republican politicians do not need to ban ESG ideas to express their dislike for them; they can simply choose not to use them. Demanding that investment groups ignore climate risks is likely to harm returns (as well as the environment). Moreover, it makes rulemaking in America look increasingly capricious, contradictory and unpredictable.
That is something that both the SFOF and the leaders of Federated Hermes should dislike. So let us hope that the latter either drops its backing for the lobbying group, or uses its financial muscle to demand a policy change. And that Republican politicians realise that attacking ESG in the name of business will actually harm — not help — business confidence in the long run.
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