Until recently, Federated Hermes was a darling of the sustainability world. The Pittsburgh-based fund manager, with combined assets of $1.6 trillion, has appeared to champion environmental, social and governance goals — and his London-based team is admired for the advice he gives to institutional managers.
But then it turned out that Federated Hermes is also the so-called “gold sponsor” (ie funder) of the Government Finance Officers Foundation. SFOF is a Republican lobbying group that campaigns to divest public pension assets from funds and companies hostile to fossil fuels.
Chris Donahue, its chief executive, says this controversial position simply reflects a desire to support “diversity of thought” in polarized times. Maybe so. But three large Danish pension funds issued furious complaints. In other words, the halo has cracked.
Other Western companies should take note. On the one hand, this case highlights how closely ESG activists are now tracking an issue that has often been (unfortunately) overlooked – the extent to which US companies support lobbyists and industry groups, and whether this is consistent with their stated public stances on a variety of issues . Other corporate boards should prepare for similar scrutiny — and potential disruption.
The second key point is that America is now a minefield for financial companies when it comes to ESG. Companies like Federated Hermes are trying to make an almost impossible circle, and the challenge is only going to get worse.
The issue at stake is that in the last few years there has been increasing pressure on financial companies operating in the European Union or in liberal states such as California and New York to adopt ESG norms. That’s because investors, including big pension funds, are increasingly demanding more disclosure on issues like carbon emissions – and are using ESG ratings from organizations like MSCI to judge how to allocate money.
This has caused a dizzying growth rate of ESG products. But it has also sparked a backlash from parts of the Republican Party that oppose so-called “woke” ideas and any restrictions on the fossil fuel industry. One sign of this can be seen in the outpouring of criticism against ESG from figures such as Fox TV host Tucker Carlson and former Vice President Mike Pence.
The conservative-leaning Supreme Court also ruled in June that the Environmental Protection Agency cannot limit carbon emissions without special approval from Congress. While this EPA decision has received less public attention than the court’s overturning of abortion rights, it is critical for business because it could also undermine the work of agencies such as the Securities and Exchange Commission.
The Republicans’ central focus, however, is state-level laws: policymakers seek to limit ESG products at the local level. In Florida, for example, Gov. Ron DeSantis has lashed out at Disney over its LGBTQ policies and — recently — told state pension funds to exclude ESG considerations from their work.
States such as Idaho and West Virginia are introducing rules that could prevent their public pension funds from investing in ESG products or companies. Last week, the Texas government issued a blacklist of ten financial companies that state and school pension funds should avoid because the organizations are believed to be boycotting fossil fuels. Nine of them are European, but one is American – the mighty BlackRock.
Unsurprisingly, this has sparked vehement complaints. “Trying to stop an American company from doing business in its own backyard is bad for business,” Mark McComb, head of BlackRock’s US business, told the FT.
In an effort to avoid blacklisting, some US banks and asset managers are busy pointing out to Republican politicians that they, too, are still financing fossil fuels. Ironically, BlackRock is the largest investor in Texas oil and gas groups, a point that infuriates some climate activists.
But it is hard to please both the pro and the anti-ESG camps. Or as one major British fund manager complains: “It seems increasingly difficult to create a single strategy for the US market.” And devising different approaches for different regions is expensive and likely to invite accusations of hypocrisy – as Federated Hermes has now found.
It’s definitely depressing. In my view, it is perfectly reasonable for investors and politicians to challenge ESG principles and reject some of them; frames are imperfect. Often a strength of the US political structure is that it allows for a lot of experimentation with local politics.
But Republican politicians don’t have to ban ESG ideas to express their distaste for them; they can simply choose not to use them. Requiring investment groups to ignore climate risks is likely to harm returns (as well as the environment). It also makes rulemaking in America increasingly capricious, controversial, and unpredictable.
This is something that both the SFOF and the leaders of Federated Hermes must dislike. So let’s hope the latter either drops his support for the lobby group or uses his financial muscle to demand a policy change. And that Republican politicians realize that attacking ESG in the name of business will actually hurt, not help, business confidence in the long run.