Environmental, Social, and Governance (ESG) investing is facing a barrage of attacks - from criticisms of “woke capitalism” to state bans on ESG investing including a Florida law that prevents the state’s pension funds managers from considering ESG criteria.
I have spent the last 22 years of my career in economic development, global Impact, and ESG investing. From my perspective, these condemnations and policies designed to protect the fossil fuel industry show a deep misunderstanding of ESG investing. ESG is not an ideology but a lens applied to investment due diligence that integrates real world impacts. Removing this lens is tantamount to saying “I would rather invest in a vacuum - the physical world should not impact my portfolio.” That is a short term utilitarian choice some investors may continue to make - but I believe they do so at their own peril.
ESG Critics Are Failing to Consider Stranded Asset Risk
Policymakers enacting bans on ESG investing are ignoring the risk of obsolete energy sources becoming stranded assets. Fossil fuels may dominate the global energy system today, but new government regulations and changes in consumer behavior are likely to lead to a sharp decline in the use of coal, oil, and gas. The 2022 World Energy Outlook projected that demand for fossil fuels is peaking and will soon begin to decline steadily.
Stranded asset risk is not fully reflected today in the value of companies that extract fossil fuels. If this risk was priced in, as I think it will be in the future, this would result in a sudden drop in value that would affect investors and shareholders. Whether you believe in climate change or not — as an investor, it is a dangerous bet to continue to invest in an industry which has a high probability of becoming obsolete.
Americans’ Views on Fossil Fuels are Changing Across the Political Spectrum
No matter where your views fall on the political spectrum, if you are concerned about climate change you are in the majority. In 2019, Pew researchers found that 77% of all Americans wish to prioritize renewables over fossil fuels. That figure includes a significant number of GOP voters. If we look at the study’s findings broken down by political affiliation and gender, 66% of Republican women said they wish to move away from fossil fuels and 60% of Republican men agreed.
Another Pew study from 2021 found that 88% of polled Republicans were supportive of specific policies to reduce climate change, while 73% were supportive of providing a tax credit to businesses to develop carbon capture and storage. The Republican politicians that are taking action against ESG are apparently not paying attention to the shifting views of their own voters.
Americans Want Climate Solutions – Your Voice Can Make a Difference
I believe that bans on ESG investing pose financial risks to investors. More importantly, I believe policy attacks on ESG pose a variety of risks to humanity and the natural world by exacerbating climate change. Despite all evidence of danger, the GOP appears to be on track to ramp up attacks on ESG throughout 2023.
With public opinion shifting, now is the time to act. I call on every American to send messages to your local and state representatives, treasurers, and comptrollers to express support for a clean energy transition, including investments in ESG solutions.
- Stephanie Cohn-Rupp, CEO, Veris Wealth Partners
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