The anti-ESG funds exploiting the US political divide

On the homepage of strive.com – the website of one of the most well-publicized anti-ESG funds operating in the US – is a YouTube video. “The goal is to restore the voice of the everyday citizen in corporate America where they haven’t been heard,” declares an enthusiastic Vivek Ramaswamy, Strive Asset Management’s co-founder and the author of ‘Woke, Inc.: Inside Corporate America’s Social Justice Scam’.

He says that the world’s largest asset managers are ignoring their fiduciary duty by placing emphasis on socially responsible strategies. Strive, he says, looks to increase shareholder value alone. Strive 500 ETF (STRV), one of three funds the firm has launched this year, will use stakeholder votes to put pressure on companies to focus on maximizing profits and staying out of politics. It has already urged Apple, for example, to scrap its 'racial equity audit' and remove diversity from its hiring policy considerations.

Anson Frericks, Strive’s other co-founder, says they became concerned with “increased polarization” across both the political and corporate landscape.

He met Rawaswamy at an all-boys private school in Ohio where they played basketball together. Afterwards, Frericks started working his way up the ranks at brewer AB InBev, while Ramaswamy courted investors to found biotechnology firm Roivant Sciences. All the while, they kept in touch.

Atlanta, Georgia, lost Major League Baseball’s (MLB) summer All-Star Game last year over the league’s objections to a sweeping overhaul of the state’s voting laws that includes restrictions on voting by mail. Critics have said the legislation would disproportionately affect Black voter turnout rather than tackle perceived election fraud. Delta Airlines and Coca Cola, both based in Georgia, were among the corporate firms that came out against the change.

When some of Frericks’ neighbours started throwing out soda cans, avoiding Delta flights and refusing to go to another MLB game, he thought there might be something in it.

The Strive US Energy ETF fund, the company’s first product, which focuses on domestic power companies, has already amassed more than $355.53 million in net assets since opening to the public in August, according to the company’s website.

Environmental, social and governance (ESG) investing has been catapulted into the media spotlight over the last decade. A recent study by Bloomberg Intelligence reported that global ESG assets may surpass $41 trillion by 2022 and could total $50 trillion by 2025.

The mission to do well by doing good has attracted the biggest names in finance, but vocal members of the political right are not happy, creating new laws that ban state investors from backing companies with an ESG agenda.

The concept of applying ESG criteria to the financial markets has turned into a fierce political debate that is shaping how US lawmakers manage their electorate’s pensions and how retail investors declare whose side they are on.

To understand where the assault on ESG has come from, it is important to look at the strategy’s evolution and how it departs from traditional value-focused investing.

As with many things in the US, religion plays a role, says Shivaram Rajgopal, the Kester and Byrnes Professor at Columbia Business School.

Pax World, founded by two Methodist ministers in 1971, is often cited as one of the first socially responsible investment companies. Dr Luther Tyson and Jack Corbett opposed the Vietnam War and forged a partnership in a bid to move their church finances away from it.

Values-focused investing has always had some sort of link to politics, according to Rajgopal. In 1986, the US government passed an act designed to help end apartheid government in South Africa. The legislation included a ban on air travel as well as on new US loans and corporate investments in South Africa.

“There has always been a sense of values,” says Rajgopal.

But as ESG investment has been adopted by banks and asset managers in the 21st century, the practice has been challenged, attacked and rejected by many, regardless of their regard for green finance.

Some believe it enables greenwashing by companies, overstating their altruistic actions. Some argue investors are charged higher prices for products that carry the same risk as their traditional counterparts because of their green credentials.

Stuart Kirk, former global head of responsible investment at HSBC, was suspended by the bank following controversial remarks he made about climate change at a conference, before ultimately resigning in July. Writing in the Financial Times in September, he said he is not “anti-ESG”, but the nebulous concepts of social responsibility and sustainable finance need serious reform.

Others still, such as Strive’s founders, argue the markets should stay out of politics altogether when their first duty is to shareholders.

Ironically, the latter point has in part prompted politicians to weigh in on the debate. Governors in West Virginia, Idaho, Oklahoma, Texas and Florida have created new policies and laws that restrict who the states will do business with in a move to protect what they see as an attack on local economies dependent on carbon-intensive industries.

Texas – the first state to pass anti-ESG legislation – bars local authorities from doing business with institutions that Comptroller Glenn Hegar has deemed are “boycotting” the state’s fossil-fuel producers.

This summer, Florida’s governor banned state pensions from considering ESG factors in investments and proposed legislation to stop banks from discriminating against clients for their political beliefs. A further six states have proposed similar legislation against meddling investors.

Appetite for ESG funds is already more subdued in the US compared with Europe, partly as a result of the political divide. The market’s comparative lack of structure and maturity has also led to lower performing assets. A report by Investment Metrics last year found that high-ESG European stocks outperformed more often than their US counterparts.

Some investment managers have chafed at increased regulations and commitments on sustainable investing that they believe threaten shareholder returns.

Matt Cole, Strive’s head of product, became disillusioned with ESG investing after 15 years working on structured securities and US Treasury portfolios at the California Public Employees’ Retirement System (CalPERS), among the US’s largest state pension funds.

Providing retirement security gave him “meaningful” work throughout his career, but something early on struck him as odd. CalPERS divested from some of its tobacco stocks when he was an intern in 2000. The investment staff recommended against it at the time, he says, and the company went on to miss $3.581 billion in investment gains between then and June 2018 as a result, according to a report by Wilshire Associates.

Later, when the fund signed up to the United Nations Principles of Responsible Investment, Cole says he felt pressured to put all decisions through “this ESG lens”. Being in the fixed income division, he says he struggled to find attractively priced ESG bonds. They would often trade at a higher price as a regular bond with the same risk “because it would have that green label.”

He felt his duty was to enrich the pensions of public service workers rather than the global move to ESG and, ultimately, “just did not see the investment case for it”.

His wife, Anastasia, came up with an idea for an investment firm that would focus solely on shareholder value and reached out to white-label exchange-traded fund (ETF) firm Alpha Architect, the same service provider Frericks and Ramaswamy had started working with to create Strive.

Alpha Architect’s owners brought the two groups together.

Political division in the US has not only stifled green investment but also fostered an environment where conservative funds can thrive. The administration of former president Donald Trump discouraged sustainable investing and environmental protections by pulling out of the Paris Climate Accords while rolling back environmental regulations.

President Joe Biden brought the US back into the agreement on his first day in office in January 2021, but a suite of conservative or anti-‘woke’ investment funds were established during Trump’s time in office.

Strive was not the first investment company to launch in response to the anti-ESG movement.

BAD Investments, which holds assets in the betting, alcohol and tobacco sectors, launched its BAD ETF late last year. The American Conservative Values ETF (ACVF), whose mission statement is to boycott companies that go against right-wing values, was set up by William Flaig and Tom Carter in 2020.

Carter says he and Flaig decided to launch their fund because they felt there were few options for right-leaning members of the public who wanted returns reflective of the S&P500 but only if the companies they invest in are not “hostile to conservative values”.

Older still is the MAGA ETF, which invests in companies in the S&P500 Index whose employees and boards are “highly supportive of Republican candidates” and dates back to September 2017.

It is a small but competitive corner of the ETF market. Flaig and his team issued a press release shortly after Strive’s launch in May this year, welcoming Ramaswamy to the conservative investing family and pointing out their own presence.

“We’re happy to have a respected voice with a megaphone join us in challenging the epidemic of corporate wokeness sweeping through boardrooms,” Flaig said in the release.

Frericks says that Strive’s ETFs are not anti-ESG at all. The DRLL fund, for example, counts renewables firms First Solar and Clearway Energy as assets.

“For us, it’s really about being a better fiduciary and filling a fiduciary gap for, we think, the vast majority of Americans whose interests are not being well represented,” he says.

Ramaswamy’s appearances on Fox News and in the Wall Street Journal helped Strive pick up investment in its first ETF early on and outstrip the emerging politicized investment space. Its second fund, STRV, has also overtaken some older products since launching in October.

It has net assets of just over $58.85 million as of October 25, according to the company website, while the two-year-old small cap ACVF’s net assets come in at just $31.84 million.

Most other funds that invest in politically conservative causes are small and, while they’ve gathered much media attention in recent months, that hasn’t necessarily translated into assets under management, says Robert Eccles, visiting professor at Oxford University’s Saïd Business School.

He calls the anti-woke financing movement a “tempest in a teapot”. No socially responsible investment fund on either side of the political spectrum, he says, has ever reached the same scale as the more traditional products of big asset managers such as State Street.

“You’ve got to ask yourself: ‘How important is this really?’ It’s entertaining but is this really moving capital?”

The numbers, he says, suggest not.

Screening against companies because of their green credentials and haranguing others to drop their decarbonization goals goes directly against the Biden administration’s goal to reach net-zero emissions by no later than 2050 and stave off the worst of climate change.

Strive has already got to work, issuing an open letter to Chevron on September 6 arguing that an oil company has no business attempting to cut the carbon emissions of its own operations and supply chain.

Carter at ACVF believes owning even a small stake in a company can make investors heard. The fund’s largest asset is Microsoft, which ACVF has targeted with shareholder proposals to explain the reasoning behind its diversity and inclusion programme. The amount of shares a company owns doesn’t affect its ability to get a proxy proposal and other investors’ attention, he says.

Neither Eccles nor Rajgopal, however, believe anti-woke funds have the capacity to make much impact on company behaviour. Even Strive’s hundreds of millions of dollars in holdings are tiny compared with the likes of State Street and BlackRock, says Rajgopal. Issuing letters and proxy proposals as a small shareholder is little different than the long-running practices of corporate gadflies.

“The voting idea only makes sense if you have a lot of votes,” says Rajgopal.

Even state legislatures won’t do much to influence corporate behaviour. Rajgopal took a closer look at state pension funds shortly after Texas announced its boycott of fossil-fuel divestment companies for an article in Forbes. The overlap between the state’s list of banned funds and investors and the actual holdings of large Texan state pension funds, he says, was “almost zero”.

“Let’s say you are banned from coming to my apartment. If you’ve never come and you don’t intend to come, what is the point of this?” asks Rajgopal.

Eccles argues the legislation has more potential to damage shareholder returns than net-zero targets. Ordering institutional investors to not screen out oil and gas companies could make them overweight their portfolios in that part of the energy sector even when better returns could be found elsewhere in the long run.

Neither does there seem to be any slowdown in interest in sustainably responsible investing. A recent study by PwC found that 81% of institutional investors in the US wish to increase their investment in ESG products in the next two years.

Rajgopal believes the current progress of ESG investment in the US has more potential to delay the Biden administration’s climate goals than anything else. Many net-zero pledges by corporations, he says, are “highly limited in their scope,” as they only factor in the carbon emissions directly related to their operations (Scope 1 and Scope 2) while ignoring those created across their supply chains (Scope 3).

Carbon capture technology also still has some way to go, while hundreds of groups rely on carbon offsets to lower their emissions.

The offset market is “all over the place,” he says. “The bigger issue is that without regulation or taxation, it’s incredibly difficult to change behaviour.”

In a nod to that lack of regulation, the Securities and Exchange Commission has proposed new rules to crack down on misleading marketing in the ESG space.

One of the SEC’s proposals is to extend a rule that requires funds that purport to focus on a particular type of investment to prove that 80% of their holdings match their names. The extended rule would apply not only to traditional 'growth' or 'core' funds, but also to those that claim to focus on ESG, sustainability or even so-called sin stocks.

Hundreds of companies have rushed to comment on the proposal before the November 1 deadline.

New proposals to add clarity to ESG investment have already put sustainable investors on edge.

Aniket Shah, managing director and global head of ESG and sustainability strategy at Jefferies and an adjunct professor at Columbia University’s School of International and Public Affairs, tells Euromoney that there is an “enormous amount of fear” in the industry as it continues to grapple with ways to establish reliable carbon emissions data and explain the reasoning behind their investments.

Rajgopal has taken several deep dives into the holdings of conservative investment vehicles including MAGA ETF, a fund established by Point Bridge Capital to back companies that give to the Republican party.

The fund’s website states it provides everyday investors with “the opportunity to make investment decisions based on their Republican political beliefs.”

Writing in Forbes, however, the Columbia professor says the fund’s holdings are “rife with contradictions” on ESG. Five of its top 10 holdings, for example, advertise themselves as pro-ESG.

Vadim Avdeychik, partner at Clifford Chance in New York, says these rules would apply equally to ESG and anti-ESG investors: “Any fund, whether it’s anti-woke or woke for that matter, would still have to meet existing regulatory requirements.”

The founders pushing the anti-ESG movement into the spotlight have big plans. Frericks wants Strive to last 100 years and become the world’s largest asset management company. The team has launched three passive ETFs this year (the latest, which offers exposure to semiconductor manufacturers, launched in October).

Frericks says their liquidity and availability to all made them a good place to start, but he sees the Strive brand branching out into almost every facet of finance over the next decade. He reels off a list of potential avenues including more actively managed funds, separate accounts and fixed income products.

He mentions venture capital and private equity, banking, insurance and even consulting services as Strive “hopefully becomes a trusted brand”.

But it is still early days. Given Strive only launched this year, its ETFs aren’t old enough to receive ratings.

Rajgopal is not convinced. How many of the top-10 firms in the S&P500, he asks, have been around for 100 years? IBM and Exxon might be exceptions, but given the rate of technological churn, “just staying on the treadmill, never mind running faster” is hard for anyone. “History just doesn’t support that argument.”

At ACVF, Carter also sees fixed income products in the company’s future, as well as new prospectuses and methodologies to win over conservative voters. One idea is a fund built on companies that are right leaning “at their core, maybe started by veterans or former first responders with a conservative background”.

Carter says he’s not too concerned about the ambitious new kids on the block: “A rising tide lifts all boats, and the more companies that enter into this, the more we get awareness.”