„ESG investment endures because it makes financial sense“
Mr. Pedersen, banks in the US are withdrawing from the Net-Zero Banking Alliance. Is this the beginning of the end for sustainable investments there?
No, but it highlights the deep divisions in the United States. The current ESG debate there is not just a matter of corporate strategy but a highly politicised issue. In conservative states like Texas or Florida, there is strong opposition to climate investing. Politicians argue that ESG investments are ideological and harm investors. Some states have even passed laws that make certain sustainable investment strategies more difficult, or penalise banks and asset managers for their ESG strategies.
That doesn’t sound very welcoming for an ESG executive…
…true, but at the same time, there is the other side: The so-called „Blue States“ like California and New York remain committed to ESG investments. Public pension funds there continue to invest heavily in sustainable assets. Bloomberg reported some time ago that a major US investor was considering withdrawing billions from the funds of ESG-critical asset managers, and reallocating them to more sustainable alternatives, due to political developments.
State Street lost a 20 billion pounds mandate from The People’s Pension to Amundi and Invesco after exiting the Net-Zero initiative.
That’s right, and it shows that while some are declaring ESG dead, others are actively investing in it.
So, ESG is not retreating in the US after all?
No, quite the opposite. The market is simply more polarised. Companies and investors have to decide where they stand. Those looking to do big business in Texas or Florida may tread more carefully with ESG positioning. At the same time, there is a massive market for sustainable investments that continues to grow.
Which leads to your firm, for example, securing a major mandate from CalSTRS…
Correct. And then there's the economic factor: Companies invest in sustainable technologies because they are profitable. Texas is the best example. The state is deeply Republican and politically opposed to ESG, yet it is the leading producer of renewable energy in the US. Why? Because it makes financial sense. Wind and solar are simply the cheapest energy sources.
That sounds crazy. Texas blocks ESG on a political level but heavily invests in renewables?
Exactly. The government there has created regulatory hurdles, but companies are not pulling out of renewables. Texas even attempted to introduce new subsidies for gas power plants to slow down the renewable transition. Yet, even major energy corporations backed out of these plans – simply because it wasn’t economically viable. This shows that ESG investments survive not because of political convictions but because they make financial sense.
Let’s turn to Europe. Things seemed more stable here, but recently the German Investment Funds Association (BVI) reported a significant decline in interest in ESG investments over the past year. Are you noticing this as well?
Yes, in retail investment, but not among institutional investors. Many pension funds now have to deliver on the promises they made years ago. We are happy to help with that – often resulting in mandates for us, like a recent 1.25 billion euros sustainable equity mandate with VBL. But the dynamics have changed: A few years ago, it was about declarations of intent; today, regulators and stakeholders expect concrete results.
Sustainable funds underperformed after the Ukraine war because they excluded oil and gas stocks. Has that deterred investors?
Partly. For ten years, excluding oil and gas was a performance advantage. Then the market shifted. But sustainable investments are designed for the long term – short-term fluctuations are part of the game. The key question is: Do investors believe in the long-term transformation of the economy? Those who do remain committed to ESG investments.
Looking at defence stocks – can they be considered sustainable?
So far, we have mainly excluded arms manufacturers involved in nuclear weapons. That includes most of the big names. Now, we are fundamentally rethinking our approach. The geopolitical landscape has changed. Europe’s defence must be financed. Some investors argue that there can be no sustainability without security. That’s why we are discussing whether certain defence companies could be included in sustainable portfolios.
But that could contradict ESG criteria. How do you resolve this conflict?
It depends on the approach. Some sustainable funds apply strict exclusions, while others have more flexible criteria. We assess whether companies produce only defensive military equipment or engage in questionable business practices. Ultimately, we need to align with our clients on what solutions they want.
ESG data is often difficult to compare. How do you handle that?
We have a team of 30 people dedicated to analysing data. ESG ratings vary significantly between providers. We don’t blindly rely on them but conduct our own evaluations. A major issue is that much of the data is based on estimates. ESG reporting is not yet as standardised as financial reporting. Regulation is improving the situation, but challenges remain.
Is greenwashing a concern for you?
NGOs will always be critical. Sustainability is a matter of definition. But real greenwashing, in my view, is knowingly making false promises – we don’t do that. But transparency is key. We’ve seen companies portray themselves as more sustainable than they actually are. As asset managers, it’s our job to scrutinise them closely.
