Governance (potentially) off the table in New Hampshire
A newly proposed bill in the New Hampshire House of Representatives has the potential to take the politicisation of ESG to the next level.
William Bryant, Head of Advisory
Over the last few days a lot of the news has been focused on the Republican party in New Hampshire. However, it is not the primary election that is of particular interest to us as a responsible investment advisor (although the direction of the US presidency will likely have an impact on the direction of travel for responsible investment in the US, but that is not the focus for this note).
Three Republican representatives have proposed a bill that would prohibit the New Hampshire Retirement System (‘NHRS’) from investing with firms that ”consider environmental, social, and governance (‘ESG’) criteria” within the investment process. They rationalise this on the fact that ‘the investment goal should be to obtain the highest return on investment for New Hampshire’s taxpayers and retirees.’
The proposed New Hampshire bill has a number of hoops to jump through before coming into effect, but does signify a step up in proposed anti-ESG legislation. A number of US states have implemented legislation that prohibits investment decisions that are solely based on ESG criteria. Something that fits with fiduciary duty. This proposed bill focuses on the mere consideration of ESG criteria, not that ESG factors are the primary factor for the investment, but are just part of the investment decision making process.
This past summer, NHRS committed to the Ares Pathfinder private credit fund. Ares, on their website, emphasise how they weave sustainability into their business including responsible investment practices, which have ESG factors as a key consideration during the investment decision making process. It would be expected that for a firm such as Ares, which an institutional name within the asset management industry and has been a signatory of the UN supported PRI since 2020, would take into account material ESG factors within their investment process. Ares is by no means the only manager among NHRS’s investments that are signatories of the PRI or who embed ESG considerations in their investment processes.
Given that all signatories of the PRI commit to ‘incorporate ESG issues into investment analysis and decision-making processes’, if this bill was to come into force it would mean that NHRS could not invest with any manager that is a signatory of the PRI, or certainly any financial product that was included within a signatories’ responsible investment policy.
The consideration of governance within the investment process is something that asset managers have been doing as part of their investment due diligence process for eons. No asset manager that is able to pass an investment due diligence process from an institutional investor is able to ignore poor governance practices when making investment decisions. However, under this proposed bill, if NHRS invests in a fund that considers the governance at a company that it invests in, then NHRS staff could face between one and 20 years in prison.
At NorthPeak Advisory we believe that much of the existing anti-ESG legislation is based upon a misunderstanding of what role the inclusion of ESG information in the investment process plays, and we have previously discussed the fundamental flaws with such legislation. We firmly believe in the need for asset owners and asset managers to invest in alignment with fiduciary duty, with the maximisation of financial returns while minimising risk. The acronym or label ‘ESG’ carries diverse interpretations, with some associating it with traditional impact investing that may place non-financial goals above financial ones, thereby potentially violating fiduciary duty. Our stance, however, firmly rejects the idea that appropriately assessing financially relevant ESG information could ever constitute a breach of fiduciary duty.
We watch and wait as the proposed bill is scrutinised and passes through the appropriate processes in Concord. If this bill passes, we feel for the investment staff at NHRS and the thousands of beneficiaries they serve, as NHRS looks to fulfil their fiduciary duty while being only able to invest in those fund managers that do not consider environmental, social, not to mention, governance factors.
Get in touch at info@northpeakadvisory.com if you would like to discuss this in more depth.