The rising opposition to environmental, social and governance metrics could lead to a confusing landscape for institutional investors evaluating the impact of their assets, said Hugh O’Reilly, executive director of Innovate Cities, during a session at the Canadian Investment Review’s 2023 Risk Management Conference.
“There has been a war declared on this south of the border, but that is going to reverberate north.”
After an initial period where ESG standards were championed across the investment space, perspectives are now changing, he said. “In other words, [companies have] gone from talking about, ‘Hey, we’re an ESG champion,’ to now they’re doing it quietly. That tells you that we’re in a risk environment here.”
Read: Research finds pensions struggle to determine metrics for ESG goals
Indeed, divisiveness around ESG metrics and the role they play in investment decisions has increased in the U.S., particularly due to political oppositions arguing in favour and against these rules. There’s a new environment of “open opponents” against ESG products and metrics within companies and institutional investors, he added. “All of a sudden, ESG has become contested.”
The difficult political landscape has given rise to new talking points against the use of ESG opportunities, said O’Reilly, noting the voices against ESG claim there’s a lack of returns. He said he worries about a new battleground of opinions where stakeholders will also begin contending diversity, equity and inclusion strategies.
“When you encounter shareholder meetings where issues about choice [and] political issues are on the table or left versus right, this party versus that party, is it something you’ve considered?”
It will be key for institutional investors to communicate ESG policies moving forward, since savvy stakeholders will demand to know more based on what opinions they might hold, he said. “Real life politics is going to show up in the world of ESG and the way we do our policies.”
Still, there’s a real concern that ESG metrics will actually come under threat and will then have to justify their purpose, said O’Reilly, urging attendees to review their ESG policies specifically from a legal perspective.
Read: Majority of Canadian institutional investors consider climate change a top ESG focus: survey
“I think every fund in this room and every asset manager would have a little piece on ESG policies. But are you updating it in the context of the new challenges? Are you effectively communicating this to members? Are your annual reports the best way to do it? Or are there other ways to do it?”
Despite these challenges, he highlighted the opportunity for the industry to advance the investment metrics used in pursuit of improving the worst climate change scenarios. He remains hopeful ESG metrics will help investments trend in the direction of positively impacting the environment. But in order to achieve that, he said ESG rules have to become an organic part of the investment process.
O’Reilly admitted he was initially against metrics resembling ESG standards when he was a pension lawyer. In fact, his passion for ESG topics comes from being a convert on these metrics. It wasn’t until he reviewed the topic thoroughly with an academic that he changed his perspective. “It was like the scales were lifted from my eyes.”
Read more coverage of the 2023 Risk Management Conference.