ESG-labeled investment funds risk losing investors if Republicans take back control of the US Congress.
A Bloomberg News survey of attitudes to ESG found that about 45% of terminal readers expect money flows to funds donning the ESG label to slow with a GOP victory at Tuesday’s election. Roughly one third said there won’t be any impact, while 5% said flows will increase and almost 15% aren’t sure. Bloomberg surveyed 550 terminal users over the past month.
The results come amid signs that Democrats’ prospects for retaining command of Congress are fading. A combination of high inflation and concerns about a potential recession, plus weak performances by Democrats in recent debates in key states such as Georgia and Pennsylvania, mean Republicans will almost certainly win control of the House and maybe the Senate.
“If Republicans retake either house of Congress, I expect them to highlight their concerns about ESG issues,” said Jon Hale, director of sustainability research for the Americas at Morningstar Inc.’s Sustainalytics unit.
Environmental, social and governance investing has become a hotly debated topic this year with prominent Republicans such as former Vice President Mike Pence attacking the strategy, saying its driven by “left-wing radicals.” Texas and West Virginia are among GOP-led states that are penalizing financial firms that they say are hostile to fossil-fuel companies, while Florida has barred its retirement funds from using ESG factors in its investments.
A Republican victory would likely result in hearings on Capital Hill. Andy Barr, a House Republican from Kentucky, told the Washington Post this week that ESG “will be one of the major focuses of oversight of a Republican majority” on the House Financial Services Committee, which oversees the nation’s banking, insurance and real estate sectors. He called ESG “a fraud on American investors.”
The role of politics has created a lot of questions about ESG, but by holding hearings and trying to limit investors’ freedom to consider ESG risks and opportunities, Republicans will be giving ESG proponents a chance to articulate their case, Morningstar’s Hale said.
“Their claim is that ESG-related issues like climate risk distract from the pursuit of ‘pure profits,’” he said. “The reality is that considering and managing ESG risks helps investors and companies understand how important issues like climate and human capital are to the pursuit of profits.”
Bloomberg also received 141 responses to its survey from readers of Bloomberg.com. About 47% said less money will go to ESG funds in a GOP victory; 33% said there will be no impact; and 6% said more money will go to ESG with the balance of respondents not sure.
New investments in ESG have slowed dramatically this year with the global slump in financial markets. Roughly $10 billion was invested in US sustainable funds during the first nine months, down from closer to $55 billion a year earlier, according to Morningstar data. The decline occurred amid concerns about inflation, rising interest rates, a global energy crisis and a possible recession.