At Portsmouth-based investment firm Impax Asset Management, climate change and long-term environmental challenges are part of the investment strategy.
The company is betting that the future will require sustainable companies and a transition to clean energy, says CEO Joe Keefe. And they say following that bet can bring big profits to investors.
“This transition creates new risks … as well as new opportunities to invest in companies that will be the companies of the future,” Keefe said.
It’s a strategy Keefe says should be central to any investment portfolio. But it’s something Republicans and other politicians are increasingly pushing back against.
Gov. Chris Sununu signed an executive order last week prohibiting employees of New Hampshire’s retirement system from investing in funds “solely” based on “environmental, social and governance criteria” (ESG). And state lawmakers are moving forward with a bill that would require the state pension system to report quarterly on the existence of any funds “that may have mixed, rather than sole, interest investment motives.”
The effort is part of a pushback by Republicans nationally against a type of investment criteria they see as politically motivated: ESG. The acronym refers to a series of considerations some funds make when choosing what to invest in, such as a company’s climate change plan, the gender balance of its executives or its stance on data security.
For Republicans and other opponents, the focus on these factors is political and detrimental to the purpose of mutual funds: to make the most money for their clients.
But pro-ESG investors like Keefe say such investments really seek the greatest returns because they account for dynamics that can affect a company’s value.
The long-term view
Keefe argues that the purpose of ESG has been misunderstood.
“The whole point of investing in a way that includes looking at ESG factors is because you believe those factors may carry risk or may carry opportunity,” he said. “All investing is about minimizing risk and maximizing your opportunity.”
ESG-based investment analysis is not designed to prioritize politics over fiduciary responsibilities, Keefe says. Instead, it aims to use these considerations to better evaluate stocks and companies in which people can invest. This, in turn, can improve returns on investment, he argues.
For example, Keefe said climate change should be considered when evaluating a company’s business model — from their location to the durability of their products to the sustainability of their operations — to determine whether they represent a good long-term investment.
And other ESG criteria can also affect investment returns, he said; better gender equality or better treatment of workers can lead to better long-term growth for a company, he said.
For Keefe, the governor’s executive order limits investors’ choices. And he says preventing funds from using ESG criteria removes a key tool that many investors are starting to use.
An analysis of the world’s largest asset managers by ShareAction, a responsible investment organization, found that 82 percent of those managers voted in favor of climate change policies on company boards, and 81 percent voted in favor of social issues .
Keefe says this is proof that this method of investing is here to stay, whether states seek to limit it or not.
Sununu sees it differently.
“I’ve been working with both the retirement system and the Treasury over the last year, just constantly trying to get assurance that we don’t have investments that are made with the sole purpose of ESG,” he said at a news conference last week. “Because they traditionally come back with much lower returns and I’m obviously very focused on maximizing returns and minimizing risk.”
Sununu said there was no indication the retirement system made any of those investments, but argued the executive order would prevent them from doing so.
And he said regular reporting would help preserve that divide.
Republicans vs. ESG
New Hampshire Republicans have tried to regulate ESG practices at private banks with legislation in recent years, but failed.
A 2022 bill would prohibit banks and financial institutions in New Hampshire from discriminating against individuals, associations or companies based on ESG criteria. But that bill was turned into a study committee to examine the need for anti-discrimination protections for bank customers based on their political beliefs and associations.
A similar bill was held up in the House Commerce Committee this year; it will be voted on by the full house next year.
But Republicans are poised to pass a bill that would require the state pension system to disclose investments in mixed-use funds. this account House Bill 457was passed by the full House and is soon to be voted on in the Senate.
Sununu’s executive order follows New Hampshire Attorney General John Formella’s move to join a lawsuit seeking to halt a Biden administration rule supporting ESG. The rule allows pension funds to use ESG criteria in their investment decisions without needing client permission, reversing efforts by the Trump administration to ban them from doing so.
“Asset managers shouldn’t have an automatic green light to just start funneling trillions of retirement dollars into ESG investments without their clients directing them, and that’s exactly what they’re going to get … if we don’t stop this,” Formella said in a statement at this time. “Dollars and cents should drive crucial and potentially risky investment decisions for people, and the policy objectives of the asset manager should not play a role.”
Keefe says the concern is overblown.
“ESG is really just a tool,” he said. “Financial investors have different tools at their disposal. … And we think it’s a bad idea to deny certain tools to investment professionals.”