Republicans recently took control of the House of Representatives in the 118th Congress, and one of the items at the top of their priority list is a slew of inquiries into environmental, social and governance (ESG) issues.
Broadly, ESG commitments have become popular with many investors and asset managers, as managers offer more investment opportunities that meet the demands of some of their clients. That has been true even as asset managers face pressure from major institutional investors to continue developing strategies that meet climate targets, and from the SEC to avoid “greenwashing” investment products.
However, from a policy perspective and after a ride of popularity in a Democratic controlled Congress, the political tide has now turned with a new GOP-led House. The incoming chairman of the House Financial Services Committee has promised that committee Republicans “will work together to conduct appropriate oversight of activist regulators and market participants who have an outsized impact.” The latest on this politically charged issue comes from three legislative bills – Putting Investors First Act, Ensuring Sound Guidance Act, and Mandatory Materiality Requirement Act – all aimed at limiting ESG in investing
The Putting Investors First Act is the most recent of the three bills to be introduced, this one focused on proxy advisory firms. Proxy firms make recommendations to institutional shareholders on how to vote their shares at annual meetings, which increasingly involve ESG issues. The bill would require proxy firms to demonstrate that their voting recommendations are in the best economic interest of shareholders. While proxy firms are independent entities, the perspective of the bill suggests their recommendations unduly influence shareholders of companies to vote in favor of pro ESG initiatives. Ultimately and from a reputation perspective, the bill puts unprepared asset managers on the defensive by forcing them to defend their ESG investment offerings and the role proxy firms play in their decision making.
The themes included in the three bills will be central to Republican efforts against ESG investing over the next two years. While the bills are unlikely to become law, asset managers will continue to face greater reputational hurdles as they attempt to balance political pressure with institutional investors’ climate demands and complying with SEC rules in a way that meets the needs of their investor clients. Particular to their clients, asset managers have to be creative in how they offer ESG investing products because not all of their clients view these issues through the same political or ideological lens.
Specifically, as asset managers continue to find value in providing ESG investment opportunities to their clients, they will be compelled to communicate the value of such strategies in ways that effectively balance the often diverging interests of their clients as well as political and regulatory stakeholders, and how their unique ESG approaches manage business risks and opportunities.
The key will be communication. Here are three key things for asset managers to keep in mind:
Clarify principles of investing
From a reputation perspective, navigating through criticisms of investing strategy is more manageable when a trusted relationship with clients, shareholders, policymakers, and ESG related stakeholders has already been established, and they all understand the core values that drive those decisions. To that end, it is imperative to proactively communicate to those stakeholders the fundamental principles that drive investment decisions through a narrative that focuses on maximizing long-term returns. That includes explaining what factors are considered and referencing supportive investment history data points – both from the perspective of what is best to serve investor clients.
Proactively develop messaging
While it is impossible to foresee every issue, many of the challenges regarding ESG investing are clear. To avoid last minute scrambles to figure out what to say, prepare messaging now that responds to expected issues and tough questions.
For instance, to prepare for issues about proxy advisor recommendations:
- What role do proxy advisory firms play in responding to shareholder proposals?
- How does your company balance the advice proxy firms provide to shareholders with protecting your clients’ economic interests?
To prepare for issues about ESG and its impact on returns:
- What is the measurable evidence that environmental and/or social factors impact returns?
- What is done to ensure ESG products and services also maximize investment returns for clients
- How do you maintain quality control when measuring non-financial ESG factors?
As part of drafting responses to these questions, it is crucial to get input from a range of internal stakeholders (e.g., legal, client services, investor relations, marketing) to ensure an integrated view. Accomplishing these tasks before issues arise will help to ensure messaging alignment across the business, and lessen the time needed to respond when the time comes.
Additionally, message testing should be considered to gauge whether those messages will resonate and help anticipate potential reactions from certain stakeholder groups.
Align with government affairs
Recently, politicians have made ESG as much a policy issue as an investor story, and asset managers should pay close attention to how they manage their political stakeholder relationships. Avoiding confusion in policy circles is important, so messaging directed to client services and IR stakeholders should closely align with what the government affairs team communicates to lawmakers and regulators.
In addition, consider engaging with key non-governmental stakeholders to communicate details about approaches to and impact of ESG investing. Dialogue with influential ESG leaders helps to create an echo chamber of support, and develops valuable relationships for the long-term.
Shifts in political news cycles can be unpredictable, and they happen fast. Despite best efforts to avoid involvement in noisy and distracting political debates, sometimes companies find themselves being pulled in anyway. The companies that are best able to manage corporate reputation while leading through issues related to ESG will understand the changing governmental and political dynamics through the lens of how they affect their reputation in front of their clients, and prepare accordingly.
Jamaal Mobley ’04 is an Executive Vice President, Strategic Situations at Edelman Smithfield. Jamaal has over 15 years of experience counseling companies on reputation matters and strategic situations including M&A, leadership transitions, financial public policy and regulation, privacy and cybersecurity. You can follow Jamaal on LinkedIn. The original version of this article was published by Edelman Smithfield, a specialist advisory in financial markets and strategic situations.