Green investments in the political crossfire

The dividing line between proponents and critics of ESG in the USA is increasingly the same one running between Democrats and Republicans. However, resolutions by some “red” states to bar their pension funds from taking climate risks into account in their investment processes are doubly detrimental because they harm both returns and our environment. Meanwhile, Wall Street is exploiting the political polarization in its own special way.

ESG in the crosshairs

The US midterm elections will soon enter the home stretch. Their outcome could turn out tighter than long suspected because voter sentiment in the United States remains very polarized. This is exemplarily evidenced not least by the recent episode centered around former US President Donald Trump and his taking of top-secret documents with him when he vacated the White House. In the slugfest between “blue” (Democratic) and “red” (Republican) politicians and their tussling for hegemony over public opinion, the color “green” has also increasingly come into play lately because observations in recent weeks have revealed that the dividing line between proponents and critics of the sustainability (ESG) investment style is increasingly the same one running between Democrats and Republicans. Two “red” US southern states specifically made headlines in this context in August.

Florida Governor Ron DeSantis passed a resolution ordering the state’s pension funds to invest public money in a manner that exclusively prioritizes earning the highest return on investment for Florida’s taxpayers and retirees without taking the “ideological agenda” of the (ESG) movement into consideration. The resolution explicitly directs state pension funds to no longer factor environmental, social and governance issues and corresponding ESG risks into their investment decisions. That State of Texas, in turn, published a list of ten publicly traded financial institutions that (allegedly) “boycott” fossil fuels. It’s a stigmatization that could force Texan pension funds to sell their shareholdings in the cited companies (in accordance with a state law passed in 2021). Alongside nine asset managers located in Europe, the list included only one US-based institution, but a gigantic one: BlackRock, the world’s largest asset manager, with more than USD 10 trillion of assets under management. BlackRock quickly responded with a written defense that denounced the politicization of state pension funds. It’s a valid criticism considering that BlackRock, among other things, is the second-largest shareholder in Texas-based oil giant ExxonMobil and has invested a total of over USD 100 billion in Texan energy companies. Rivals of BlackRock such as asset manager Invesco and the banks JPMorgan and Goldman Sachs, which likewise have been declared “hostile” to the oil and gas industry by the State of Texas, did not turn up on the final red list. The ten institutions on the list now have time until the end of November to convince the State of Texas to change its mind.

It is understandable that not just investors, but also politicians call ESG principles into question and/or reject some of them because establishing a universally valid and (internationally) binding framework continues to be a work in progress. And a frequent strength of the political structure in the USA is that it allows local policy experimentation to take place. But (Republican) politicians ought not ban ESG concepts, but instead could just simply ignore them. In any event, explicitly requiring asset managers to intentionally disregard climate risks harms returns on investment in all probability (and thus hurts investors) and definitely harms our climate in any case.

A fitting ETF for every (political) taste

The (US) financial industry wouldn’t be the (US) financial industry if it didn’t cash in on the stark political polarization of the country. Some providers of exchange-traded equity funds (ETFs) have discovered an untapped market niche precisely here. They have created products that deliberately go against the ESG mainstream and thus are likely to tend to appeal to conservative (voter) groups (but not necessarily to conservative investors). ETFs with tickers like VICE or MAGA (Make America Great Again) make it evident straightway in which industries or in accordance with which political coloration their managed assets get invested. Even a God Bless America ETF (YALL) is slated to be launched soon. But the one that really takes it to extremes is the BAD ETF, which invests exclusively in gambling, alcohol, drugs and other so-called “sin” sectors. The imaginative ingenuity and business acumen of the ETF sponsors appear to know no limits thus far, but that could change in the future if some recent proposals put forth by the US Securities and Exchange Commission get put into practice. ETF providers would then have to prove that at least 80% of the portfolio assets packaged in their exchange-traded funds are aligned with their ETFs’ respective names. In other words, they would have to prove that an ETF’s contents match its label. This would likely make substantial portfolio reshuffling necessary for some of the ETFs cited above and would inevitably cause headaches for the product managers of VICE, MAGA, YALL and BAD because it might be difficult for them to furnish the required proof. Most investors, however, are unlikely to care much about this sideshow anyway because judging by their puny fund sizes, the products cited above haven’t progressed beyond a marketing-gag stage thus far.

Nothing more than a marketing gag | Often only an expensively acquired underperformance thus far

MAGA, VICE and BAD vs. SPY (S&P 500 ETF)

Sources: Bloomberg, Kaiser Partner Privatbank