Regulations and Recession Fears Are Making Managers Rethink ESG

Asset managers are pumping the brakes on environmental, social, and governance strategies. 

Forty-eight percent of asset management CEOs plan to pause or reconsider their ESG efforts over the next six months, according to KPMG’s 2022 U.S. CEO Outlook, which is expected to be published on Tuesday. Thirty-one percent of the CEOs said they had already done so.

KPMG based the result on a survey of 81 asset management CEOs, most of whom are leaders at private equity firms, hedge funds, real estate investment funds, and other alternative asset managers. They spanned across North America, Europe, and the Asia-Pacific region. All participants were surveyed between July 12 and August 24. 

The growing hesitancy about ESG strategies comes at a time when asset managers are facing pushback from red state politicians. Recently, policymakers in Florida, West Virginia, Utah, Minnesota, Louisiana, and Arizona have proposed anti-ESG bills that could prevent state institutions from working with managers that include ESG-related factors in their investment processes.

At the same time, ESG managers are facing increased scrutiny from the U.S. Securities and Exchange Commission. In May, the SEC proposed to prevent misleading or deceptive ESG fund names, such as “ESG-focused funds,” “integration funds,” and “impact funds.” Under the new proposal, investors would be required to disclose the ESG factors used for each ESG-labeled investment strategy and the use of third-party ratings.

According to the KPMG survey, managers see frequently changing regulations as one of the biggest challenges to delivering their ESG strategies.

And it’s not just political divisions in the U.S. that are complicating matters around ESG. According to Sean McKee, national practice leader of public investment management at KPMG, asset managers also face diverging views on ESG across different countries. “What the U.K. and the U.S. think, even if they are aligned, may not be perfectly [the same] in terms of the extent of regulation,” he said. He added that a lot of U.S. asset managers have significant overseas operations and must have a global perspective when implementing their ESG policies.

Besides regulatory uncertainty, deteriorating macroeconomic conditions are also driving asset managers to remove ESG from their strategic priorities. According to the KPMG report, 91 percent of asset management CEOs agree that there will be a recession in the next 12 months. The top two steps that chief executives plan to take in preparation for the anticipated recession are to pause their ESG efforts and downsize their employee base, according to the KPMG survey.

“Some challenges are more present and clear than others,” McKee said, adding that it makes sense for some asset managers to prioritize preparing for an imminent recession over focusing on long-term ESG goals.

According to McKee, just because managers are pausing their ESG strategies doesn’t mean they will abandon them altogether. Some managers are just “waiting for clarity to understand what the challenge really is,” he concluded.