DeSantis’ attack on ESG repudiates his top returns


Why is Florida’s first-term governor the most visible adversary to Wall Street’s most dynamic and successful company? If you’re 43-year-old Yale University and Harvard Law School-educated Navy veteran Ron DeSantis, getting everyone’s attention makes perfect political sense, if only to bolster your position as the preferred Republican successor to Donald Trump.

Revoking special tax and self-governing privileges from the Walt Disney Co. when the state’s largest private employer criticized the DeSantis law banning classroom teaching about sexual orientation was just its first provocation this year. This was followed by his revamping of a congressional map decreasing black representation, suspending Tampa’s elected state attorney for refusing to enforce the state’s 15-week abortion ban and announcing that a new election police are bringing criminal charges against 20 people for voting by mistake in 2020 in a dubious crackdown on petty voter fraud.

DeSantis’ latest salvo attacks money management behemoths for opposing fossil fuels, voter suppression and criminalization of reproductive rights (policies championed by the governor) while adopting anti-corruption strategies. investment that promotes sustainability or meets the needs of the present without compromising the ability of future generations to meet their needs. Asset allocation based on environmental, social and governance – ESG – criteria represents an industry worth at least $35 trillion, or 53% larger than the US economy in 2021, according to Global Sustainable Investment Alliance. DeSantis would have us believe that the third most populous state will have no ESG share in the $240 billion portfolio of more than 30 Florida pension and catastrophe funds.

“From Wall Street banks to massive asset managers and big tech companies, we’ve seen the corporate elite use their economic power to impose policies on the country that they couldn’t achieve at the ballot box,” the governor said in his July 27 “Initiatives.” to Protect Floridians from ESG Financial Fraud,” approved by the state Board of Directors last month. DeSantis said his “actions” prohibiting the SBA “from considering ESG factors when investing” state money “protects” more than 21 million Floridians “from woke capital.”

But DeSantis is less than meets the eye in the new investment network he’s created. By excluding ESG, Florida violates its own initiatives, which “require SBA fund managers to only consider maximizing return on investment on behalf of Florida retirees.” Banning sustainability from consideration results in lower performance over any time period over the past decade, according to data compiled by Bloomberg. Whatever the flaws in ESG investing, many of which were recently documented by Bloomberg News, there are few signs that the most rewarding trend for fund managers around the world is abating.

“The tectonic shift toward sustainable investing is accelerating,” wrote Larry Fink, CEO and co-founder of BlackRock Inc., whose $10 trillion in assets makes it the largest fund manager. , in its annual letter to CEOs. “This is just the beginning” because “stakeholder capitalism is not about politics,” Fink wrote. “It is not a social or ideological program. It’s not “awakened”. It’s capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your business relies on to thrive. This is the power of capitalism.

Indeed, the largest exchange-traded fund investing in ESG, the iShares ESG Aware MSCI USA ETF, has grown its assets 4,700x to $24 billion since its inception in 2016 and 80x in the past three years. , according to data compiled by Bloomberg. Investor appetite for ESG, as measured by fund flows to sustainability ETFs, has increased 56-fold over the past three years, at a time when the largest – the SPDR S&P 500 ETF – recorded growth of 2%; the largest technology ETF, Invesco QQQ Trust, rose 42%; and the No. 1 energy ETF, Energy Select Sector SPDR Fund, rose two and a half times.

Aggregated clean energy ETFs, which are part of the “E” in ESG, saw net inflows increase to more than $7 billion in 2021 from an average of $456 million per year before 2019. ETFs Traditional industry-focused ETFs were little changed as fossil fuel ETFs saw an outflow of $1.4 billion this year and clean energy ETFs attracted $1 billion, according to data compiled by Bloomberg.

One of the main reasons ESG attracts so much investment is that it crushes traditional investment benchmarks. Companies committed to environmental, social and governance responsibilities have helped the Bloomberg SASB Large Cap ESG Select Index deliver a total return (income plus appreciation) of 150% since its inception in 2014. The Russell 3000 has gained 136% in during the same period. The ESG index has appreciated 74% over the past five years, outperforming the rest of the stock market by five percentage points.

Florida and other states, such as Texas and West Virginia, which vilify fund managers for favoring ESG over fossil fuels, will have to reconcile their preference for unnecessary risk when punishing the mob ESG. ESG has produced higher returns with less volatility than traditional equity indices since 2020, according to data compiled by Bloomberg. The total return of the Bloomberg ESG Index is more than six times that of the largest ETF investing in traditional energy since 2014. Over five years, ESG gained 73% as fossil fuel stocks appreciated by 57%.

While the last 12 months are the exception to the trend, when ESG lost 11% and traditional energy gained 72%, the risk profile of fossil fuels eclipses ESG as measured by fluctuations in price over 200 days. Fossil fuel volatility was 77% higher than ESG in 2020 and remains consistently elevated relative to ESG, according to data compiled by Bloomberg.

Stability is particularly relevant for public pension funds in the bond market, where the specific needs of retirees must be matched by consistent income payments and where ESG-linked debt in its infancy is already outperforming the broader market for corporate debt. Sustainability, as measured by the Bloomberg MSCI US Corporate ESG Weighted Total Return Index, provided more than 50 basis points of additional income and appreciation relative to the Bloomberg US Corporate Bond Index on one, five and 10 years with a lower volatility of 4%.

“ESG is increasingly influenced by market forces and international dynamics,” said Shari Friedman, managing director of climate and sustainability at Eurasia Group. “While we may see corrections and detours along the way, the long-term trend of ESG as a growing asset class and increasingly important factor in access to capital will continue. “

All of this should make us wonder why Florida’s Ivy League-educated governor prides himself on being ignorant.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Matthew A. Winkler, Editor Emeritus of Bloomberg News, writes about the markets.

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