We continue to advise asset managers currently touring the US to raise capital, that they need to pick a side.

Not because we think polarisation should be embraced in any way - but because anything else could put these asset managers in legal jeopardy. 

The growing risk of green-bleaching

We have had conversations with hedge funds who joke that they explain how they integrate ESG principles into their investment process when pitching in Illinois – and state that they do not, nor ever intend to, integrate ESG when they pitch in Idaho.

The risk is that if the investors in Idaho discover that the asset manager does in fact integrate ESG into their investment process, they may pursue that asset manager in court.

A large US pension fund for example, will nearly always insist its contractual mandates are governed by the laws of the state where the pension fund is headquartered. So it might be fair, if crude, to suggest that in the current politicized environment, the Idaho courts will be more sympathetic to an Idaho pension fund than a New York or London hedge fund.

If the fund were to have underperformed its benchmark, then the possible cost to a manager of losing such a court case could be hugely damaging.

In short, green-bleaching is rapidly becoming as dangerous as greenwashing in the US. 

Impossible to placate both sides of this debate

Blackrock has stepped back from most ESG commitments, in order to safeguard its business with certain federal and red state organisations.

However it has now come under fire from Brad Lander, the New York City Comptroller. For context, New York City’s 5 public pension funds have an aggregate $235bn in capital - and they also have an explicit 2040 Net Zero target.

Lander has said that asset managers who do not “incorporate material climate change-related risks and opportunities in investment decision-making” and do not “engage portfolio companies to drive real economy decarbonization” are likely to lose their investment mandates.

And notably, he has added that asset managers will be judged according to their broader investment portfolios, not just the money they manage for New York City’s retirement funds.

This supports our conclusion that asset managers will struggle with a strategy to integrate ESG for some funds, and not for others. 

They will increasingly be forced to pick a side.