Why is the first-term governor of Florida the most visible opponent of Wall Street's fastest-growing and best-performing business? 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 Walt Disney Co.'s special tax and self-governing privileges when the state's largest private employer criticized the DeSantis law prohibiting classroom instruction about sexual orientation was just his first provocation this year. That was followed by his redrawing of a congressional map diminishing Black representation, suspending the elected state prosecutor of Tampa for refusing to enforce the state's 15-week abortion ban and announcing new election police pressing criminal charges against 20 people for mistakenly voting in 2020 in a dubious crackdown on insignificant voter fraud.
The latest salvo from DeSantis assails the giants of money management for opposing fossil fuel, voter suppression and the criminalizing of reproductive rights (policies the governor champions) while embracing investment strategies furthering sustainability or meeting 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 is at least a $35 trillion industry, a figure 53% greater than the US economy in 2021, according to the Global Sustainable Investment Alliance. DeSantis would have us believe that the third most-populous state will have no part of ESG in Florida's $240 billion portfolio of more than 30 pension and disaster funds.
“From Wall Street banks to massive asset managers and big tech companies, we have seen the corporate elite use their economic power to impose policies on the country that they could not 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 Administration last month. DeSantis said his “actions” prohibiting the SBA “from considering ESG factors when investing” state money “are protecting” more than 21 million Floridians “from woke capital.”
But DeSantis is less than meets the eye in the newfangled investment web he created. By excluding ESG, Florida violates its own initiatives, which “require SBA fund managers to only consider maximizing the return on investment on behalf of Florida's retirees.” Prohibiting sustainability from consideration results in inferior performance over any period during the past decade, according to data compiled by Bloomberg. Whatever the flaws of ESG investing, many of which were recently documented by Bloomberg News, there are few signs that the most rewarding trend for money managers worldwide is abating.
“The tectonic shift towards sustainable investing is accelerating,” Larry Fink, the chairman, chief executive officer and co-founder of BlackRock Inc., whose $10 trillion in assets makes it the largest money manager, wrote in his annual letter to CEOs. “This is just the beginning” because “stakeholder capitalism is not about politics,” Fink wrote. “It's not a social or ideological agenda. It is not `woke.' It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
Sure enough, the largest exchange-traded fund investing in ESG, the iShares ESG Aware MSCI USA ETF, increased its assets 4,700 times to $24 billion since its inception in 2016 and 80 times the past three years, according to data compiled by Bloomberg. Investor appetite for ESG, measured by flows of funds into sustainability ETFs, increased 56 times during the past three years, a time when the largest –- the SPDR S&P 500 ETF -- saw 2% growth; the biggest technology ETF, Invesco QQQ Trust, grew 42%; and the No. 1 energy ETF, Energy Select Sector SPDR Fund, expanded two-and-a-half times.
The aggregated ETFs in clean energy, part of the “E” in ESG, saw net inflows increase to more than $7 billion in 2021 from an average $456 million yearly prior to 2019. Traditional industry-focused ETFs were little changed when fossil fuel ETFs experienced a $1.4 billion outflow this year and clean energy ETFs attracted $1 billion, according to data compiled by Bloomberg.
A big reason why ESG is attracting so much investment is because it’s crushing the traditional investment benchmarks. Firms committed to environmental, social and governance responsibilities helped the Bloomberg SASB Large Cap ESG Select Index produce a total return (income plus appreciation) of 150% since its inception in 2014. The Russell 3000 gained 136% in the same period. The ESG index appreciated 74% during 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, that vilify money managers for favoring ESG over fossil fuel, will need to reconcile their preference for unnecessary risk when they punish the ESG crowd. ESG produces higher returns with less volatility than traditional stock market benchmarks since 2020, according to data compiled by Bloomberg. The total return of the Bloomberg ESG Index is more than six times greater than the largest ETF investing in traditional energy since 2014. Over five years, ESG gained 73% when fossil fuel shares appreciated 57%.
While the past 12 months are the exception to the trend, when ESG lost 11% and traditional energy gained 72%, the risk profile of fossil fuel dwarfs ESG as measured by 200-day price fluctuations. Fossil fuel volatility was 77% greater than ESG in 2020 and remains consistently elevated compared to ESG, according to data compiled by Bloomberg.
Stability is especially relevant for state pension funds in the bond market, where the specific needs of retirees need to be matched with consistent income payments and where ESG-related debt in its infancy already outperforms the broader corporate debt market. 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 than the Bloomberg US Corporate Bond Index over one, five and 10 years with 4% less volatility.
“ESG is increasingly driven by market forces and international momentum,” said Shari Friedman, managing director for climate and sustainability at Eurasia Group. “While we might see corrections and detours along the way, the long-term trend of ESG as a growing asset class and increasingly important factor for access to capital will continue.”
All of which should make us wonder why the Ivy League-educated governor of Florida is proud to be ignorant.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Matthew Winkler
