Political populism poses a fundamental threat to ESG investing, with laws being passed and battles being fought in multiple states that would bar ESG considerations from being used in the management of public employee and related pension assets regardless of whether those considerations are material to an investment decision. 

But ESG considerations are based on justifiable investment objectives that have been used in good corporate governance for decades. Blocking their use excludes a perfectly sound approach to investment decision making, creates less efficient markets, makes securities markets less efficient and poses a real threat to fiduciary duty.

The politicians and commentators demonizing what is a demonstrably viable approach to investment decisions serves only one purpose: To help them gain the spotlight in pursuit of their own objectives. 

ESG may or may not be for every investor or every public company. But it’s critical to allow investors to employ their own yardsticks and methodologies to make their own investment decisions.  

It’s important to remember that the ESG investing approach is not new. “Socially conscious” investing has been an accepted strategy pursued by some of the largest mutual fund sponsors, since at least the early ‘80s in response to the stated desires of a maturing baby boom generation and early members of Generation X. 

While the universal packaging (and “buzzwording”) of such socially aware investing into one uniform ESG package may have become problematic, breaking down the components offers clearer insights into why the elements of ESG investing play a critical role in determining the financial health and future prospects of a publicly traded company:

• Environment: Assesses a corporation’s impact on the environment, including how the company manages environmental risks and opportunities in the areas of climate change, resource management, pollution and biodiversity. 

• Social: Examines a company’s relationships with its employees, suppliers, customers and communities in areas such as labor practices, human rights and community impact.

• Governance: Evaluates the quality and structure of a company’s leadership and its adherence to ethical practices such as board of director independence, fair and transparent compensation practices aligning with shareholder interests, and protection of shareholder rights.

It’s unclear what in that investment strategy stack bears banning. When examined and assessed individually, it’s understandable why these key elements play into a comprehensive evaluation of a company's prospects. Each, individually, could have serious impacts on a company’s bottom line, with commensurate effects on stock prices and returns.

It appears that political attempts to criminalize or restrict ESG tools demonstrate a fundamental lack of understanding of fiduciary duties—which is what states owe to their former employees, for instance, in the management of their retirement funds. 

Investment decisions should be based on material considerations relevant to the client and not influenced by political rhetoric. If a segment of the population enthusiastically embraces the approach, why seek to ban it?

Politicians are not asset managers, and when they attempt to play that role, they often fail miserably. They do not have fiduciary duties to investors and really should not dictate the factors investors should consider when making decisions for income, growth and retirement. That’s an individual decision to be made between the investment manager and the client, whether it be a pension fund or an individual.

Despite the public onslaught, the significance of ESG considerations in asset management has been steadily increasing, reflecting a broader societal shift towards sustainability and social responsibility. 

As someone deeply involved in these discussions at CFA Institute, I have witnessed how ESG factors are becoming integral to investment strategies. This trend is not just a reflection of market demands but also a response to the evolving expectations of investors, particularly millennials and Gen Z, who prioritize issues such as climate change, social justice and corporate governance.  

That hasn’t stopped states such as New Hampshire and Texas from pushing the restrictions, however. Legislative moves in New Hampshire to criminalize ESG investing and the prohibition of some large asset managers from doing business in Texas, highlight the tension between political agendas and investment strategies. Unfortunately, extreme politicization of pension investment management may help re-elect an officeholder, but it could easily destroy retirement security for many and injure local economies across entire states.

In fact, the “pushback against the pushback” is more than just political. Recent studies have shown that prohibiting ESG considerations can have significant financial repercussions, with states creating higher risks for their portfolios and higher borrowing costs for their own bonds. Estimated losses and increased borrowing costs for the six states covered in the study: More than $700 million.  

By way of background, ESG practices saw significant growth from 2020 to 2022, driven by market conditions, social movements such as Black Lives Matter, and climate-focused policies under the Biden administration. However, as post-Covid market dynamics shift and political rhetoric intensifies, the urgency of ESG practices seems to have waned.

The argument has been that ESG considerations are politically driven and are fading as political climates change. However, the evidence of global trends and the younger generation's priorities suggests otherwise.

In conversations with professionals and investors, it is clear that while governance remains a fundamental aspect of fiduciary duty, the combination of environmental and social factors under the ESG umbrella is evolving. 

Younger investors, such as millennials and Gen Z, are increasingly focused on issues like social justice, environmental sustainability and workplace well-being. This generational shift is influencing investment strategies and necessitating a re-evaluation of what fiduciary duty entails.

What has yet to fully unfold is the impact of the wealth transfer from baby boomers to millennials and Gen Z. This transfer will significantly amplify the focus on ESG considerations. As younger investors inherit substantial assets, their values and priorities will increasingly shape the investment landscape.

When assessed independently, each ESG component can have a powerful influence on the prospects of a single issue or a collective industry. Neglecting those elements can be harmful to long-term returns.

Investment decisions should be based on material considerations relevant to the client and not influenced by political rhetoric. The relationship between the individual investor and their investment professionals is the priority. 

But genuine fiduciary duty requires that all relevant factors that impact the risk and return profile of an investment be taken into account. And, in many, if not all cases, that necessarily includes ESG considerations. By taking them into account, fiduciaries ensure their investment choices align with their clients’ values and long-term objectives in an evolving financial landscape. By refusing to take them into account, risks and costs can only increase.

 Paul Andrews is managing director of research, advocacy and standards at CFA Institute.