ESG Part 3: The Florida Debate

David R. Kotok

There are many positive analyses demonstrating the importance of ESG. Here is one from the Wharton School, “Making the Business Case for ESG,”




In a conversation with Wharton’s Katherine Klein, Wharton Professor of Management Witold Henisz discusses environmental, social, and governance (ESG) criteria and outlines the various objectives that inform ESG:


I think it’s important to distinguish two groups of investors within the ESG space. For a long time, there has been talk about sustainable and responsible investing, or socially responsible investing. Those are more focused on the social consequences of firm behavior…. And there have been plenty of investors who, on moral grounds or values-based grounds, have said, “I don’t want to invest in companies that pollute. I don’t want to invest in fossil fuel companies. I don’t want to invest in weapons manufacturers. I don’t want to invest in companies that are engaged in gambling.”

Those investors are still there, and they are part of the broader ESG movement. But what distinguishes ESG from those other incarnations is that we’re really talking about the business case, that when you invest in a company that is involved in fossil fuels, that has not prepared itself for the climate transition, that’s a company that is going to underperform in terms of its share price. So, we’re bundling together the people who care about climate with the people who care about the bottom line. That makes for a winning coalition, and we can really [e]ffect change when we can make not just an ideological case but also an economic case around these factors.


In “The Case for Sustainable Investing” (, Audrey Choi, Morgan Stanley’s Chief Marketing Officer and Chief Sustainability Officer, addresses the business case for ESG investing.


AUDREY CHOI: The biggest myth — and until recently, the biggest obstacle to the pursuit of sustainable investing — has been that to invest sustainably, one must sacrifice returns. But, in fact, we have analyzed the data and found that this simply is not true.

Recently, the Morgan Stanley Institute for Sustainable Investing analyzed 11,000 mutual funds, comparing the performance of sustainable strategies versus traditional strategies from 2004 to 2018. And we discovered that the sustainable strategies performed in line with the traditional strategies — with one big difference: The sustainable funds had lower volatility and a 20% smaller downside deviation compared to the traditional funds. And in the last 15 months, we’ve discerned an even more interesting pattern. In 2019, sustainable strategies actually outperformed traditional funds by 2.8 percentage points. And in the volatile first half of 2020, these same sustainable strategies were more resilient — declining by 3.9 percentage points less than traditional strategies.

All this is ample endorsement of our early vision: that sustainable investing is sound investing, and that factoring in how businesses impact the environment, society and the global community is not at odds with good investing — indeed, it can make it more robust.


It’s true that ESG is not completely described, so it’s an evolving mechanism of evaluating multiple factors. There is also an evolution of disinformation and intensifying political attacks on ESG. These attacks are geared to garner media attention and muster yet another political crusade where politics was not the issue. One of the most prominent opponents of ESG in the United States governs in the State of Florida. In Florida, there is an absolute, clear directive to the investment pools that fall under the responsibility of the State of Florida to ignore, dismiss, and otherwise cease to evaluate ESG-related investments. Think about that. Here is a citation.

“Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments,”

The rhetoric surrounding this directive makes it sound as if investors are being protected from ideological crusades. The rub, however, is that there is no future or present in which environmental, social, and governance factors do not have financial implications for business and investment decisions.

Pension funds are an example. In fact, ESG is especially important for pension investments, as Sasja Beslik, chief investment officer at NextGen points out: “‘It is pension money that runs the most significant financial risk if they don’t take ESG into account…. ESG — when done for real — is first and foremost a risk-management tool. Politicians run for four years, maybe eight. But pension money is very long-term.’” See “Will Ron DeSantis’ War on ‘Wokeness’ Hurt Pension Funds?”

The implications of a policy such as Florida’s are interesting, because they apply to the G in ESG, governance, which in this instance is a policy forced by a government on market agents, professionals, and those who are responsible for the fiduciary obligations of investment decision-making. Florida has become a national leader in forging an anti-ESG legal and policy structure; and that is detrimental for investors, in our view, and for those businesses, like ours, that reside in the state. It’s an example of yet another escalation of the political culture war that displaces a reasoned, evidence-based public policy debate. There is no debate about this one. Those whose pensions are at stake and those who manage pension investments for the State of Florida have no voice in the matter. Imagine, in Florida, intentionally ruling out, for the purposes of investment decisions, the consideration of ESG factors such as sea level rise or intensifying hurricanes or pollution or poor governance.

Readers, investors, consultants and others now must ask, how will that work out?

At Cumberland, ESG factors are part of the analysis. John Mousseau, Patty Healy and I just discussed this in detail at the ESG conference at Rowan University. Please note that the estimated (by Kotok) trillion dollars of investment funds in the room were all there because they believe that ESG factor analysis is critical and improves investment results.

David R. Kotok
Chairman & Chief Investment Officer
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