In August 2022 Governor Ron DeSantis, along with fellow Trustees of the State Board of Administration, passed a resolution directing Florida’s fund managers to invest state funds to “prioritize the highest return on investment” – and to eliminate consideration of environmental, social, and corporate governance criteria (ESG) in future fund selection. In February 2023, acting on this directive, Florida’s chief financial officer, Jimmy Patronis accused BlackRock Inc. of focusing on ESG criteria rather than prioritizing higher returns for investors and, in a historic divestment, removed BlackRock as manager of roughly $600 million of short-term investments, also freezing about $1.43 billion of Blackrock-held long-term securities.
But is this move in the financial best interest of our state and fund participants? The investment and economic research firm McKinsey and Company explains that ESG links to cash flow in five important ways by (1) facilitating top-line growth, (2) reducing costs, (3) minimizing regulatory and legal interventions, (4) increasing employee productivity, and (5) optimizing investment and capital expenditures.ESG scores reflect a company’s commitment to criteria such as environmental sustainability, fair working conditions, and societal impacts and help to acknowledge and avoid potential ESG risks along with their financial repercussions. For instance, companies taking steps to cut carbon emissions and address climate resilience along supply chains may benefit financially when those supply chains are uninterrupted by flooding, extreme weather, etc. ESG companies often benefit from intangible bonuses – finding it easier to attract and retain employees, increase worker productivity, and build positive relationships and reputations with communities and customers.
BlackRock holds approximately $8 trillion in assets, making Florida’s withdrawal just a drop in the bucket. For Florida, however, excluding ESG from fund selection criteria seems illogical. As the state most vulnerable to the worsening effects of climate change, it seems appropriate to leverage a significant portion of Florida’s $60 billion in State-held taxpayer money in climate-conscious investments. With Hurricane Ian costing an estimated $112.9 billion.in 2022 and future climate-related costs anticipated to increase, Florida cannot afford to ignore the risks associated with continuing business as usual.
US carbon emissions totaled 5,981 million metric tons of CO2 equivalents in 2020, the majority generated by transportation, electricity production, industry and commercial buildings – all pillars of the business sector. Countering climate change to avoid its worst impacts requires its eco-friendly evolution. Support for ESG at a national level is expected to come from a future requirement by the US Security and Exchange Commission that large corporations disclose carbon emissions, climate – related risks, targets and goals. Private sector action on climate change also garners public support, with a recent survey of 400 SWFL residents reporting that 68% of respondents expect the private sector to take a leading role in solving the climate crisis. Integrating ESG values into companies’ core framework provides a mechanism to accomplish this.
According to Reuters, ESG funds account for 10% of worldwide fund assets, and a record $649 billion poured into ESG-focused funds globally -even amidst a chaotic economy – from January through November, 2021 up from $285 billion in 2019. These funds proved resilient through the COVID pandemic according to a report by S&P Global, based on data from 26 ESG exchange-traded and mutual funds with over $250 million in assets, which found that large, ESG-focused funds outperformed the broader market from March 2020 until March 2021. BlackRock, Vanguard, and State Street dominate the ESG field as a trio responsible for $22 trillion in assets from pension funds and institutional investors. Bloomberg estimates that total ESG investments totaled $35 trillion in 2022 and are expected to climb to $50 trillion by 2025.
Though replete with positives for both society and the environment, the rapid uptake and evolution of ESG have triggered some growing pains. With surging demand for ESG came extensive research on its framework and criteria, revealing some issues and challenges, including the need for quality improvement and accessibility to data, along with a more consistent rating system. Investors struggle with information overload while dealing with a vast sea of ESG data. Emerging complications should not lead us to shy away from ESG investing – instead, meeting challenges head-on will support improvements to data reporting and standardization, strengthening the ESG platform as a whole. Further ESG investment will provide additional resources needed to address process improvement. Yes, ESG should be refined, but it is well on its way and advancing on the right track.
To manage these ESG challenges, nearly two-thirds of global investors lean towards active funds, as active managers engage in research and fundamental analysis that overcome most ESG standardization barriers. A third of investors say, ongoing employer -led ESG education and training would help with ESG analysis and implementation.
Investors are also giving greater consideration to targeted strategies including thematic and impact investing. Almost a third of investors favor reporting on specific Sustainable Development Goals (SDGs) established by the United Nations, double of last year’s percentage.
Incentivizing ESG at the local, state, and federal levels could expedite the adoption of ESG’s foundational values. But an increasing number of politicians are, instead, jeopardizing its uptake by making ESG a partisan issue. Over 40 bills or new laws in 17 conservative-led states currently seek to penalize corporations with ESG or other social policies, up from only 6 similar measures last year. (Reuters). In 2022, investors withdrew a net $13.2 billion from ESG stock, bond, and mixed-asset funds, the first time in a 10-year period that more money was pulled from ESG funds than deposited.
Adam Hattersley, a former Florida congressman, reported that ESG has never been factored into decisions. – raising the question of why target it now? DeSantis, at a State Board of Administration meeting, stated that ESG policies “are dead on arrival.” Additionally, if Florida is to only consider the fiduciary benefits when investing, divestment should have occurred following the Russian invasion of Ukraine. Twenty-five states divested, but Florida maintained status quo and its pension fund has lost $200 million from its investments in Russia, following sanctions due to the war.
In a statement, BlackRock said that it was “surprised” by Florida’s decision to divest. “Neither the CFO nor his staff has raised any performance concerns. We are disturbed by the emerging trend of political initiatives like this that sacrifice access to high-quality investments and thereby jeopardize returns, which will ultimately hurt Florida’s citizens. Fiduciaries should always value performance over politics,” the company added.
On December 1, 2022, the federal government reaffirmed its commitment to keep ESG on the table, when the Department of Labor issued a final rule on “Prudence and Loyalty in Selecting Plan Investments…”. Stating that “retirement plan fiduciaries may consider climate change and other ESG factors in selecting retirement investments”, the rule supports the incorporation of ESG into a larger financial analysis along with multiple other factors – ESG serves as one of many tools to protect the savings and pensions of workers. It is prudent for the federal government to recognize the material impacts ESG factors have on certain markets, industries, and companies – when determining the financial viability of the plan. Ultimately, under this language, selecting a plan puts the interests of plan participants and their beneficiaries and leaves open a wider array of choices for plan managers.
By Bridget Washburn