The Bizarre Assault on ESG

I confess to bewilderment at some U.S. conservatives’ assault on the use of environmental, social, and governance (ESG) criteria in investing. Conservatives in Congress, including a few Democrats as well as Republicans, tried to overturn a Biden Administration rule allowing asset managers for retirement plans to consider firms’ ESG performance in making investment decisions. Politicians in several states have sought to bar banks that employ ESG considerations from state-government business. Most recently and most bizarrely, some have blamed the abrupt collapse of Silicon Valley Bank on its commitment to ESG, despite very clear evidence that the bank was done in by turbocharged deposit growth and excessive investment in long-term securities.

I know a bit about this. Two decades ago, when I worked at JPMorgan Chase, I developed the bank’s first ESG research products for institutional investors in stocks and bonds. Our research examined such topics as how regulations targeting plastic shopping bags and beverage containers would affect major plastics producers (not much) and whether water scarcity threatened the viability of certain industries in various countries (in come cases, yes). We weighed the investment potential of companies that manufactured solar, wind, and water-conservation products (generally with skepticism), and also urged corporate boards of directors to assign a committee to oversee management of ESG risks and opportunities within the firm.

The risks we identified were real, and our contention that investing in solar cell manufacturing and wind turbines was a bet on government policy rather than on technology saved our clients from serious missteps. Unfortunately, in part because of our well-founded doubts about the profit potential of alternative-energy firms, our work didn’t lead to much stock or bond trading, which is why all of us involved in ESG research were let go in 2009.

But that doesn’t change the fact that ESG factors pose real risks to the profits of corporations and to the ability of bond issuers, both government agencies and private-sector companies, to service their long-term debts. Investors in port authority bonds and the shares of real estate investment trusts need to understand the potential business impact of rising sea levels. Lenders to coal companies need to assess how many power plants will buy that coal a decade from now. For any bank or asset manager to ignore such risks because politicians think they should is the sort of state-managed capitalism conservatives used to be against.

Tags: environment