Responsible Business Center | The Freedom to Invest
Faculty | Nov 07, 2023 | Gabelli School of Business
Nearly half of U.S. states have considered policies that would restrict financial institutions’ ability to consider Environmental, Social, and Governance (‘ESG’) data in their investment decision-making. Twenty-two initiatives have passed versus 80 more that were soundly beaten. This mainstream investment research practice has seemingly been politicized, despite widespread acceptance and use, and arguments in favor of considering such data, by a vast majority of bipartisan investment professionals and fiduciaries of pools of capital.
A political agenda that limits access to ESG data impedes investor freedoms, violates investment professional’s fiduciary responsibility to fully evaluate risks of investments and potentially creates unforeseen costs to taxpayers and pensioners. These initiatives are wrongheaded and antidemocratic. Fordham’s Gabelli School of Business Responsible Business Center fully supports an investor’s Freedom to Invest.
As a movement, Freedom to Invest was launched in March 2023, coordinated by Ceres and the We Mean Business Coalition. Hundreds of private and public sector leaders have since joined together in mobilizing a unified message to policymakers: protect the freedom to invest responsibly. The Responsible Business Center is proud to be a signatory to Freedom to Invest.
Professional investors, investment firms, and nonprofits focused on democratic principles and investor interests and market concerns, have rallied to oppose restrictions on the freedom to make investment decisions, utilizing, among other information, ESG data.
Our position is that proposed limits on access and consideration of ESG data in making investment decisions, is immoral, antidemocratic, as well as costly as it:
1. Limits Investor Choice: Implementing restrictions on access to ESG data, limits the options available to investors who prioritize ethical and sustainable investments. It restricts their ability to align their investments with their personal values and beliefs. This limitation infringes upon the rights of investors to make their own investment decisions on whatever bases matters to them. By narrowing the range of investment options, investors are deprived of the opportunity to support companies that align with their values and contribute to positive change. ESG data is valuable to any investor, with any investment objectives, as it’s simply more material information on the companies being evaluated for investment. More material information afforded to allocators of capital, is better than less.
2. Ignores Investor Demand: Responsible investing, which considers ESG data, has gained significant popularity in recent years, with many investors actively seeking out companies that prioritize sustainability and social responsibility. One in every $4.00 is invested with ESG data considered (on the way to $1 in $3). This growing demand reflects a shift in investor preferences towards more responsible and ethical investment practices. By choice, one might simply prefer to invest in top quartile ESG companies. Why limit this? This disregard for investor demand restricts one’s right to choose investments that reflect personal beliefs and preferences.
3. Undermines Long-Term Sustainability: ESG considerations have been recognized as crucial in nudging business toward long-term sustainability and performance. By integrating Environmental, Social, and Governance factors into investment decisions, investors can contribute to a more sustainable and responsible business environment. Limiting ESG information may hinder the progress towards a more sustainable future if businesses were to neglect the importance of these considerations and minimize the voice of all people, all investors, who’d choose to influence company behaviors and longer-term direction through choice to own or not own a company’s stock. As the saying goes, ‘what gets measured, matters.’ Put another way, when businesses are held to lower or no threshold on sustainability disclosures, bad action and decisions are obscured that may cause longer-term crises for the organization, their employees, the communities where they operate, consumers, and investors. Catastrophic “G” Governance failures may increase as a function of limitations on disclosure obligations of relevant data and its consideration. This not only compromises the long-term financial returns for investors but also undermines the collective effort to create a more environmentally sustainable and socially responsible world. As such, these proposed limits can be seen as a narrowing of rights for investors (and other impacted constituencies) to participate in the pursuit of long-term sustainability and responsible business practices.
4. Contravenes Traditional Views of Markets and Capitalism: This is less a legitimate argument and more an observation of the conflict and inconsistency of ESG data detractors: If Adam Smith’s ‘Invisible Hand’ suggests markets arise and price where supply and demand intersect, using regulation to limit the burgeoning ESG data-centric market, seems anti-capitalistic.
5. Stifles Innovation: Responsible investing encourages companies to innovate and develop more environmentally supportive and socially responsible practices. By considering ESG factors, investors provide incentives for companies to prioritize sustainability and social responsibility-centric innovation, as it is good business to do good business. However, by imposing limits on ESG data consideration, there is a risk of stifling innovation and hindering progress towards a more sustainable future. Without the financial support and demand from responsible-minded investors, companies may be less motivated to invest in research and development of innovative solutions that address environmental and social challenges. This hampers the potential for positive change and restricts the rights of investors to contribute to a more sustainable and responsible business landscape. A lack of innovation in transition to more regenerative and equitable operations would violate corporate leadership’s obligations as stewards of the company and in fact, be the cause of longer-term heightened financial instability.
6. Increases Costs and Risks to Municipalities Investors and Pensioners: Recent analysis indicates that, if anti-ESG restrictions were in place, constituents in just six states would likely have seen increased interest costs of over $700 million.
What’s Really Going On
Certain politicians may prioritize protecting local industries or those whose lobbyists fund their campaigns. They’ll argue that strict ESG regulations and investment limitations could negatively affect these industries, leading to job losses or economic instability. These politicians aim to safeguard the interests of these industries by limiting the influence of ESG data on investment decisions, in so doing, limiting the costs associated with company transition toward reducing negative environmental impacts (externalities borne by all people but with no cost to the company) or affording historically marginalized leadership and staff, future prospective employees with fair access to influence, compensation and jobs. Some politicians accept campaign money for their short-term need to be re-elected, violating any obligation to we, the American people, and make longer-term decisions that are in our best interest.
Non-Fiduciary Politicians Interfering with Investment Professionals as Fiduciaries
Elected officials in the United States are not legally considered fiduciaries. A fiduciary has a legal obligation to act in the best interests of another. While elected officials have a responsibility to serve the public and uphold the law, they do not have a fiduciary duty—an actionable, legal obligation to us, unlike a trustee or financial advisor who has a fiduciary duty, by law and actionable, to us as stewards of our capital.
With rare exception, elected officials have not been investment professionals or fiduciaries. And yet, they’d insist that somehow, they know better than our stewards of capital, who, in this capacity, as fiduciaries of America’s wealth and savings, overwhelmingly, pension, endowment, and other Investment professionals—are insisting on the Freedom to Invest. The Responsible Business Center supports this initiative.
Written by: Peter Lupoff who is the director of strategy for the Gabelli School of Business Responsible Business Center, which has a mission to inspire, inform, and activate industry professionals, academics, and students to collaboratively foster a more just and sustainable business ecosystem that serves all people and sustains our planet. He also teaches “Impact Investing” at the Gabelli School.
Lupoff is the founder and principal of Lupoff/Stevens Family Office, his family’s vehicle for impact investments, as well as other grant-making, advisory, research, teaching and writing activities.
He was formerly the CEO of Net Impact (2019-22), a 30-year-old nonprofit, 160,000+ member network with a mission to inspire, equip, and activate emerging leaders to make a positive impact for people and planet. He also was CEO of GOOD Institute (2021-2022), which addresses important issues, driving social action and reimagining the possibilities for our shared future by charting a new contract between business and society.