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E-MailRobert Eccles is Visiting Professor of Management Practice at Oxford University Said Business School, and Daniel F.C. Crowley is a partner at K&L Gates LLP. This post was authored by Professor Eccles and Mr. Crowley.
On July 29, 2025, 26 members (from 20 red states and the purple state of Pennsylvania) of the State Financial Officers Foundation (SFOF) sent letters to the leaders of 25 large asset managers. The mission of SFOF is, “to drive fiscally sound public policy, by partnering with key stakeholders, and educating Americans on the role of responsible financial management in a free market economy.”
The letter begins, “As financial officers entrusted with safeguarding our states’ public funds, we write to express our deep concern about the erosion of traditional fiduciary duty in American capital markets.” And though it notes, “While some firms have recently taken encouraging steps, such as withdrawing from global climate coalitions and scaling back ESG rhetoric and proxy votes,” it goes on to list five steps firms must take in order to continue doing business with these states. This is part of the ongoing anti-ESG campaign conducted by red state attorneys general, treasurers, and auditors, and even some GOP members of the U.S. House of Representatives. As a result, red states have effectively defined ESG in ideological terms, then targeted asset managers for being overly ideological when they take account of material issues that can impact value creation.
Writing in the Harvard Business Review over two years ago, we said ESG should be returned to its “original and narrow intention — as a means for helping companies identify and communicate to investors the material long-term risks they face from ESG-related issues.” Instead, this recent letter shows that ESG has continued to get pulled into political messaging efforts between both parties rather than rightfully being considered as financially material long-term risk factors.
The essence of the letter is captured in this paragraph:
“Fiduciary duty has long been a critical safeguard that facilitated efficient capital allocation grounded in financial 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. This deterministic approach to investing is not consistent with the fiduciary’s role that recognizes uncertain and unknowable future outcomes and, hence, the construction of diversified portfolios.”
Let’s put aside the assumption that asset managers are using arguments about climate change to justify ideological positions. The more mundane reality is that asset managers are working hard to understand how companies are dealing with the very uncertain future of climate change so they can determine its relevance to long-term investment decisions. In essence, the argument is that asset managers should not think about the future. Rather, they should simply hold a diversified portfolio.
SFOF urges “passive” investors not to use their ownership positions “to actively influence company behavior beyond material and relatively short-term financial considerations,” despite the fact that asset managers generally are required to exercise a duty of care that includes voting proxies in an informed and responsible manner. There are a number of other broad issues that could affect company performance whose future impacts are uncertain, such as emerging technologies like artificial intelligence, demographic and cultural trends, inflation, tariffs, and geopolitical conflicts. Asset managers take no more of a deterministic approach to these any more than they do climate change.
The letter further says investment managers should align their behavior with “…traditional fiduciary standards, as widely understood as short as ten years ago….” In fact, it is much more complicated than that. In an extensive study of fiduciary duty, Cynthia Hanawalt and Andy Fitch found that “no field of corporate or asset management law imposes one standalone fiduciary duty.” What this means is that if red states choose to define fiduciary duty in terms of ignoring long-term risks and opportunities, they are free to do so. States can ask for separately managed accounts for the assets under their control. But to assert that asset managers who have a different view of the long-term in the exercise of their fiduciary duty raises questions about the impacts of an organization dedicated to a “free market economy.”
In contrast, although one of us (Dan) is a Republican and the other (Bob) is a Democrat, we believe free markets means freedom. Investors should be free to invest for whatever reasons motivate them, including those that might be perceived by some as ideological – regardless of which side of the political spectrum an issue falls. By the same token, as part of a free market economy, U.S. investors should be free to exercise their shareholder rights and engage with management, vote proxies, and invest in emerging markets as well as digital assets.
In the evolving modern marketplace, fiduciaries who ignore the risks associated with ESG considerations are more likely to be in violation of their fiduciary duty than those who do not. Rather than focusing on ideologically-based critiques of material risk factors in the name of opposing ideology in capital markets, states should instead focus on supporting and cultivating the world’s largest free-market economy as it evolves over time.
