Some of the world’s largest fund managers have been given an ultimatum to discard ESG as part of their stewardship criteria or risk losing work managing investments for 21 US states.

A letter sent at the end of last week from treasurers and auditors-general asked fund managers to ensure they practise “traditional fiduciary duty” that rejects “long-term risk mitigation” that considers climate change or any other “sustainability” framework, including those in the EU.

Investment managers are asked to expressly reject use of the EU’s Corporate Sustainability Reporting Directive (CSRD) in investment strategies.

The letter says: “Fiduciary duty has long been a critical safeguard that facilitated efficient capital allocation ground in finance merit rather than political ideology.

“But that clarity is being diluted under the banner of so-called ‘long-term risk mitigation’, where speculative assumptions about the future, like climate change catastrophe, are used to justify ideological conclusions today.”

The letter sets out five principles the treasurers want investment managers to follow. “Financial institutions wishing to compete for our states’ business should provide durable assurances that their practices align with these principles.”

Fund managers have until 1 September this year to respond.

Rejecting ESG criteria

Republican red states in the US have locked horns with investment managers several times in recent years, particularly with BlackRock, the world’s largest, over the use of ESG criteria in investment and proxy voting criteria.

The five principles include: “abandoning” the stance of seeing climate changes as “certain and catastrophic”; a commitment to avoid using passive investment vehicles for “proxy voting or corporate engagement”; abstaining from “embedding” international “agendas”—such as net-zero climate mandates or CSRD—in investment decisions; voting guidelines that “reflect singular focus on shareholder value” that are not “aligned” with environmental or social goals; full disclosure of all relationships with bodies such as Climate Action 100+ or Principles for Responsible Investment.

Investment managers have moved to the centre of debates over ESG principles used in business, as they struggle to deal with competing agendas among asset owners.

Some fund managers have, in recent months, resigned from groups aimed at improving the management of climate change.

That has proved controversial, even for banks. In July, HSBC became the focus for controversy when it ended its membership of the Net-Zero Banking Alliance.

A number of customers quickly ended their association with the bank, including Ecotricity, whose founder and chief executive, Dale Vince, posted on LinkedIn: “All companies that believe in net-zero—aka the green economy—should ditch HSBC.”

The EU’s CSRD is currently subject to a revision process but—along with its sister legislation, the Corporate Sustainability Due Diligence Directive—it has also become a bête noire of US politicians eager to move the US away from any programme concerned with climate change.

One senator, Bill Hegarty, has declared: “American companies should be governed by US laws, not unaccountable lawmakers in foreign capitals.

“The European Union’s ideologically motivated overreach is an affront to US sovereignty.”

In Europe, investors look set to continue viewing climate change as an investment issue and a risk. They will have to balance that with increase pressure from right-wing politicians in the US. The tension is unlikely to end any time soon.