Big U.S. managers may have to take sides in ESG political divide – Fiona Reynolds

Fiona Reynolds, the face of London-based Principles for Responsible Investment for most of the past decade, says big money managers will find it difficult over the long term to retain clients on both sides of the gaping political divide that's opened up regarding whether ESG-risk factors should be taken into account when investing public employee pension money.

Political wrangling in the U.S. over environmental, social and governance factors is nothing new, but its escalation now at the state level is making life "incredibly difficult" there for big globe-straddling money managers, Ms. Reynolds noted in an April 5 interview.

If European clients are saying "thou shalt invest this way" and a host of U.S. clients are saying "thou shalt not manage money for us this way," that leaves money managers in a bind, said Ms. Reynolds, who stepped down as PRI's CEO in late 2021 to return to Australia, where she currently serves on a number of boards and advisory groups.

The path of least resistance for those managers might be to try to play on both sides of that political divide, effectively telling clients, "if you don't want me to do this, I won't; if you do want me to do this, I will."

But with climate and energy transition risks likely to loom larger in coming years, managers could find it ever harder to square that circle, she predicted.

"This has been a very long battle in trying to get people to consider ESG issues. It's now getting caught up in politics where it's not a political issue. It's an investment issue that can impact financial decision-making, and we also know that to change the economy from a high-carbon economy to a low-carbon economy — which the countries in the world have committed to — that the private sector needs to play a role," Ms. Reynolds said.

Against that backdrop, asset owners committed to achieving climate- and ESG-related goals, including net-zero commitments, may not look kindly on money managers willing to play on both sides of the aisle, she warned.

If an asset owner is committed to decarbonizing the global economy and gives a billion dollars to a money manager in pursuit of that goal and the same manager is looking after a billion dollars for an asset owner insisting that decarbonization risks not be taken into account, "any gain in the real world is just netted out," Ms. Reynolds said.

"At some point, very large managers in the U.S. will have to take a stand about what their beliefs are, in terms of how they see risk," she predicted, adding "there has to be a reckoning."

One answer for asset managers struggling to adapt to a more difficult operating environment in the U.S. is "to be authentic and to remain true to their investment philosophy," agreed Jag Alexeyev, head of ESG insights with Broadridge Financial Solutions Inc., a New York-based provider of investor communications and technology solutions for financial services companies.

If a firm's executives and portfolio managers "see evidence that ESG factors are financially material…that considering them enhances the investment process (and) potentially improves shareholder value over the long term, then they need to remain true to that investment and probably increase the resources that they commit to embed ESG into the organizational DNA," said Mr. Alexeyev.

If global managers don't make their views on those risks clear, specialist managers could be the ones making outsized gains when it comes to accumulating assets and clients, Ms. Reynolds predicted.