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Republican AGs Warn Asset Managers of Fiduciary and Antitrust Violations in ESG Investing

A group of 21 Republican state Attorneys General issued an open letter to more than 50 of the biggest asset managers in the United States, warning them of potential violations resulting from their ESG investment activities and involvement in climate-focused alliances.

The letter, led by the AGs of Montana, Louisiana, and Utah, is the latest in a string of anti-ESG initiatives by Republican politicians in the United States, including a recent attempt to reverse a DOL rule allowing for the consideration of ESG factors in investment decisions in ERISA plans, which President Biden vetoed, and the formation last month of an alliance of state governors, led by Florida Governor Ron Desantis, aimed at coordinating actions to "protect individuals."

While many of those efforts have focused on the use of ESG factors in the management of ERISA and state pension funds, the current letter appears to be a broader attack on ESG investing in general, warning asset managers that their ESG commitments, particularly participation in alliances such as the Net Zero Asset Managers initiative (NZAM) and Climate Action 100+, "cast doubt on their adherence to fiduciary requirements, representations to consumers about their service, and representations to consumers about their service."

The Attorneys General's 21-page letter expresses a wide range of concerns, including the consistency of asset managers' commitments to climate-focused alliances with their fiduciary duties to clients, as well as the negative impact on competition from "horizontal agreements related to voting and engagement through organisations such as Climate Action 100+ and NZAM."

The letter also warns against advertising misrepresentation, with the AG contending that asset managers who have committed all AUM to environmental objectives should label all funds as ESG funds, among other things, and adding:

"Investors looking for low-cost, passive indexing investments may be funding your ESG activism unknowingly." Any misrepresentation about the money you are offering is illegal."

The AGs state that many asset managers "have not adequately explained to investors the downsides and risks" of ESG funds, and that "many of your environmental assumptions appear to be dubious."

Some of these worries have lately resulted in high-profile withdrawals from climate-related alliances. Vanguard announced its withdrawal from NZAM in December, citing the need for "clarity... about the role of index funds and how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors." Munich Re announced its withdrawal from the Net-Zero Insurance Alliance (NZIA) last week, claiming antitrust concerns.

The Attorneys General conclude the letter by stating that they "will continue to evaluate activity in this area in line with our ongoing investigations into potential unlawful coordination and other violations that may stem from the commitments you and others have made as part of Climate Action 100+, Net Zero Asset Managers Initiative, or the like."

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