Exploring the Evolution of ESG Policy in Firm Strategies

I recently spent some time swapping ideas and thoughts with a European-based company similar to Altvia. Naturally, the topic of ESG eventually came up. I purposely withheld my own thoughts, but there was a lot said (and even more implied) around the politics of ESG in the US. And, the prevailing opinion seems to be that Europe is far more sophisticated in its embrace of environmental, social, and (corporate) governance.

ESG is controversial enough without my opinion, so I’ll spare you of it. But, I am often asked to share my viewpoint through the lens of what people I talk to are saying about it. Before I say anything more, I will share one POV. I hosted a podcast episode with Holden Lee, who, in my opinion (and mine only), shared the most authentic and first truly unique perspective (that I have personally heard) on the matter. One key point I took from Holden’s thoughts is that ESG is an opportunity for asset managers to help investors understand where they are on a three-dimensional investment consideration model that stands to replace the traditional two-dimensional risk/reward spectrum.

By adding ESG as the third consideration, investors can now choose where they’re comfortable allocating assets in that dimension as it relates to the others. This approach replaces a less intentional one–if by nothing else than the politics at the core of ESG in the US–that nobody will ever choose any investment option that isn’t pro-ESG. To be overly dramatic, sometimes it feels like people are suggesting “I’ll give up my investment returns in order to support pro-ESG dynamics.” FYI: there’s a place in Holden’s paradigm for that, in addition to a place where somebody would prefer returns at the cost of ESG (and the associated risks!)

Back to the call with the European company… I couldn’t help but think about this three-dimensional paradigm upon hearing the following (paraphrased) comment: “If you want to raise money from European institutions, even if you’re a large, well-known US manager, you must have ESG in place.” To be super clear, I have no reason to disagree with that sentiment. For the purposes of properly framing what I’m wondering aloud, however, let’s assume that what’s implied in this statement (even if it’s not; I’m not here to put words in anyone’s mouth) is that the large, well-known US manager is not pro-ESG. And let’s further assume that said manager has only adopted the principles therein to raise capital from European institutional investors. If that’s the case, this US manager is even proclaiming its own independence while playing the capitalist’s game!

Here’s the point of what I’m wondering aloud: Why can the US institution commit to the same manager in the absence of said manager’s ESG policy, but the European one can’t? Other ponderings: 

  • Where does the regulatory policy begin and end? 
  • Can European institutions commit to ESG policies that are explicitly negative? 
  • Can European managers raise capital with negative ESG policies so long as they have one? 
  • And if so on the above, why require an ESG policy at all? 

Help me understand how Holden’s take isn’t the reality of how investors are actually allocating their dollars–even if not requiring an ESG policy means that they’re comfortable taking on risk/return over any ESG considerations. Please share your thoughts with me. These are sincere questions I’ve been asking myself over the last few weeks.

the impact of esg policies on US investing