ESG marketplace: Opportunities in the US market

As part of Bloomberg’s Sustainable Finance Forum, the ESG Marketplace panel covered investor interest in ESG and climate investment strategies in the US market. Chris Hackel, Head of Sustainable Indices at Bloomberg, led the discussion with Barbara Mueller, Vice President at Goldman Sachs Asset and Wealth Management, Luke Oliver, Managing Director and Head of Climate Investment, and Head of Strategy at KraneShares, and Jimmy Yan, Director of ESG at the New York City Comptroller’s Office.

Working on the ETF team for Goldman Sachs, Barbara Mueller reported seeing a demand for more differentiated products and a move away from one-size-fits-all ESG scoring rankings. She said that institutions have well-defined goals, access to data, and may have understood the first iterations of rankings, but investment advisors and their clients were confused by the meanings and methodologies. “They get distracted by focusing on a particular company and want to know why it is or is not included, so more transparency, more defined goals will be helpful. We see demand for a variety of approaches, including climate-focused ones,” she said.

Luke Oliver noted the role of the Inflation Reduction Act in changing the investment dynamics around ESG investing. “The US is investing about $400 billion in incentivizing US companies to compete and innovate. Europe’s already answered that with a $300 billion bill and China spent $500 billion last year in the same areas: battery, solar, renewables,” he said. “This race to decarbonization is going to accelerate and whoever wins that race will also win the economics of it.” He also commented on the primary areas for investment including carbon compliance markets, transition equities, and key natural resources for the transition like lithium and cobalt.

On the subject of ESG scoring issues, Jimmy Yan said that scores may not be sufficient for making investment decisions, and that he and his team are interested in low carbon-related themes, net zero strategies, and biodiversity and pollution themes. “In the New York City Comptroller’s Office, we manage the investments of the New York City pension funds, with five different pension funds and approximately $250 billion in total assets,” he said. “We are a broadly diversified investor, very long term and we’ve been focused on climate change as a very material systemic risk for our portfolios for quite a while. We’re fundamentally invested in the long term robust, continuous growth of the global economy. We want our external managers to do the best they can within their investment strategy to add value and minimize risk by taking responsible measures with decarbonization.”

Given the vigorous debate around ESG metrics, Mueller commented that it is beneficial in raising good questions about how to incorporate ESG goals with financial goals and how to measure and compare ESG products in a consistent fashion. She described a crowdsourcing approach taken by the nonprofit Just Capital, which does an annual survey of a diversified, balanced population of individuals and obtains their views on key issues for industry. The survey highlights issues like fair living wages, creation of more US- based jobs, ethical leadership, consumer privacy, and pollution reduction and has led to the launch of an ETF based on those insights.

In terms of innovative products, Oliver commented that the carbon market had shown an interesting institutional versus retail discrepancy. “We launched a fund on carbon allowances in the four major markets and usually when you launch an ETF, you start with bigger retail intermediaries, advisors, and RIAs, and then you start to get institutions. However, with this fund, our very first investors were institutions, and we haven’t seen the big retail adoption of this yet. It’s an emerging asset class,” he said.

The panelists concluded with their thoughts on the future for ESG and our ability to respond to climate change. “We have to be optimistic,” said Yan. “This is a long-term process and long-term goal for net zero. Part of our work in our net zero plan is increasing our investments with climate change solutions.” Mueller agreed that a positive attitude and continued innovation were necessary. “We have to provide the tools to get people engaged, whether that’s education, or promoting new products and solutions. The attention is important and will motivate people to take action.” Oliver concurred as well and cited the international shifts that are underway in carbon markets in Europe, for example. He also noted that it may not be necessary to invent something brand new. “We just need to scale and bring down the unit cost of all the technology that we already have,” he said, “This spending goes a long way to helping with that.”