PHOENIX – Attorney General Kris Mayes co-led a coalition of 18 attorneys general in calling on Congress to defend companies’ right to consider Environmental, Social, and Governance (ESG) factors in prudent investment decision-making.
The coalition, also led by Attorney General Keith Ellison of Minnesota, explain in a letter that ESG factors can help inform fund managers’ risk-return analyses by providing insight into a company’s ability to adapt to climate change, respond to societal trends, and maintain regulatory compliance, among other things.
The letter provides a counterpoint to some attempts by representatives to mischaracterize the consideration of ESG factors and bar fiduciaries from considering them.
One of Attorney General Mayes’ first actions was to withdraw Arizona from an investigation into major American banks and financial institutions over their ESG investment practices.
“Sustainable investments have demonstrated their potential to generate positive outcomes, both for the companies involved and for society as a whole,” said Attorney General Mayes. “I’ve spent a good portion of my political life and career advocating for renewable energy, sustainability and common-sense practices. It just isn’t the role of government to dictate to corporations how they should invest their capital – as long as they abide by the law. When companies engage in sustainable practices while complying with regulatory frameworks, they can contribute to the betterment of our planet, our nation, and our society without compromising their bottom line.”
Additionally, the attorneys general point out the significant body of evidence that shows consideration of ESG factors may lead to reduced risks and greater returns for investors. Thus, the coalition urges Congress to not prohibit fund managers from integrating ESG factors into their investment decisions to maximize returns and minimize risks.
The letter comes as representatives introduce bills that would restrict the use of ESG factors in making investment decisions, such as H.R. 5339 (“Roll back ESG To Increase Retirement Earnings Act”) and H.R. 4237 (“Ensuring Sound Guidance Act”), aiming to limit the scope of information available to fiduciaries when making investment decisions.
Additionally, Attorney General Mayes and the coalition explain that criticism of the use of ESG factors often stems from critics’ conflation of different investment strategies that employ ESG factors to inform decisions. For instance, strategies that integrate ESG factors into decision-making do so only to inform risk and return projections for a particular investment fund. This strategy prioritizes nothing but returns, and simply considers ESG factors alongside all other relevant factors in decision-making.
On the other side of the spectrum lies ESG-impact strategies, which consider ESG factors in parallel or paramount to pure risk or return considerations when investors wish to direct their assets toward investments that further particular values, such as sustainability, potentially—but not necessarily—at the expense of higher returns.
Critics of using ESG factors conflate these two strategies, seeing all ESG-based investments as prioritizing environmental or social policy preferences over returns. However, as Attorney General Mayes and the coalition explain, ESG factors are being integrated into investment decisions not to serve a particular policy goal, but rather to maximize returns and hedge against risks in this era of rapidly changing natural environments and financial markets.
The attorneys general, therefore, explain to Congress how ESG-factors can be relevant to risk-return analyses and asks Congress to protect fiduciaries’ ability to consider all information relevant to their clients’ objectives.
Joining Attorney General Mayes in signing onto the letter are the attorneys general of California, Colorado, Connecticut, the District of Columbia, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon Pennsylvania, Vermont, Washington, and Wisconsin.