(Bloomberg) — The best defense against Republican attacks on ESG is to persuade naysayers that the investing strategy can actually help financial performance, according to the chief investment officer for responsible investment at Man Group.
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The world’s largest publicly traded hedge fund doesn’t screen for environmental, social and governance risks “just to try to make the world a better place,” Rob Furdak, Man Group’s CIO overseeing its ESG assets, said at a panel hosted by Bloomberg Intelligence in London on Thursday. “We do it because we think it improves our investment process.”
Click here to access the BI event.
ESG has morphed into Wall Street’s most controversial investing strategy. High-profile members of the Republican Party have called ESG everything from woke, to anti-capitalist and even anti-American. Against that backdrop, GOP state governors, lawmakers and attorneys general have been erecting an ever greater array of hurdles in the path of the investing strategy.
“In terms of how that’s affected our investment process, it hasn’t really impacted us at all,” Furdak said. Instead, “it really reinforced our focus on financial materiality.”
Furdak said it’s also important to remember where the financial wealth lies in the US.
“There’s this perception outside the US that the US is incredibly anti ESG, but it’s a very vocal minority that seems to be getting the headlines,” he said. “There are actually more assets in pro-ESG states than there are in anti-ESG states.”
Big pension plans in California, New York, Massachusetts and Illinois are all “super pro-ESG,” he said.
Furdak said the focus of Man Group’s talks with clients in Republican states has been to emphasize that “climate change is a risk and you have to incorporate it into your framework in terms of what the potential risk is to an investment, or what the potential opportunity is in an investment, and link it back to that financial materiality.”
Read More: ESG AUM Set to Top $40 Trillion by 2030
Screens used by Man Group to identify ESG risks include things like the exposure of food companies to drought. Furdak spoke of a poultry producer, without identifying the company by name, to show how extreme weather raised its costs while flock numbers went down.
“It really impacted profits and hurt the stock price,” he said.
Investors should also be aware of such risks in the supply chains of portfolio companies, Furdak said. In can be “pretty complex,” he said. And it’s an issue that’s relevant to the mining and beverage industries when they’re located in areas that are exposed to drought, Furdak said.
The comments follow a year in which many ESG investors have faced heavy losses. The S&P Global Clean Energy Index, whose members include wind park operator Orsted A/S and solar products and services maker SunPower Corp., slumped more than 20% last year and has continued its decline in 2024. Over the same period, the S&P 500 is up about 30%.
Read More: US Investor Exodus Deals Historic Blow to Global ESG Fund Market
Not all corners of the green investing world delivered losses last year. The Nasdaq Clean Edge Smart Grid Infrastructure Index gained more than 20% in 2023, as investors bought into the underlying infrastructure behind the renewable energy transition.
And given the prospect of global upheaval, ESG may emerge as the safest investing strategy to protect against potential losses, according to Virginie Maisonneuve, chief investment officer for equities at Allianz Global Investors, who spoke during the same BI panel.
“The way I look at this is, disruption is going to become more intense,” she said. So investors need to think of ESG “as a long-term theme in a disrupted world, in a world that’s putting together a new world order. What you want is quality. You look for stability, you look for resilience. And I think ESG provides that in its analysis.”
According to Stephane Boujnah, the chief executive of Euronext, it’s clear that companies “can tap more investors if you have an ESG story which is credible, than if you don’t.” Boujnah, who spoke at the same BI event, runs a group that represents about $7 trillion in combined market value spread across about 1,900 companies.
“The answer is pretty clear and straightforward,” he said, speaking of the extent to which ESG is a fad or a permanent feature of finance. “You are better off being wrong early than being right late, because things are being shaped as we speak.”
(Adds Man Group CIO comments on aum spread from 5th paragraph.)
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