The investment strategy known as ESG is under attack, and virtually no one expects the backlash to abate.
More than a dozen Republican state attorneys general have criticized ESG’s financial practices, while Republicans in Congress plan to increase their scrutiny of what they call “wake up capitalism.” One of his main complaints is that the environmental, social and governance investment is part of a broader Democratic effort to prioritize climate change and other social issues over the fossil fuel industry.
The political assault on the right is backed by some of the biggest names in the party, including former Vice President Mike Pence and Florida and Texas Governors Ron DeSantis and Greg Abbott. Pence and DeSantis are widely seen as potential 2024 presidential candidates. Wealthy Republican supporters like Peter Thiel, as well as billionaire Elon Musk, have also criticized ESG. And there is a long list of right-wing activists, like Leonard Leo, who have spoken out against BlackRock Inc. and other Wall Street giants who they say are serving a Democratic agenda.
Such a coordinated political attack on the financial industry may be unprecedented, said Jill Fisch, a professor of business law at the University of Pennsylvania who has followed corporate governance issues for more than three decades. Fisch points out that there is “a lot of money behind the scenes,” with Big Oil among the most generous backers of Republican candidates. “I don’t see it going away,” she said.
That’s particularly bad news for BlackRock, the world’s largest asset manager and a vocal ESG supporter. Florida and at least six other states have already announced plans to withdraw funds from the New York-based firm.
The acronym ESG was coined nearly two decades ago with the idea that investors should take environmental, social and corporate governance risks into account in their financial calculations. Currently, approximately $8.4 trillion is invested in ESG-related products. But according to Republican politicians like DeSantis, ESG “sacrifices returns on the altar of a select few, unelected corporate elites and their radical agendas.”
DeSantis has proposed a framework for anti-ESG bills that Florida lawmakers are expected to take up at their next session in March. The proposed legislation will prohibit state fund managers from considering ESG factors when investing funds. Meanwhile, Florida’s chief financial officer Jimmy Patronis is withdrawing $2 billion from BlackRock in the largest anti-ESG withdrawal announced by any state, and has advised the state’s investment arm to stop working with the firm, which indicating that more withdrawals may occur.
In Texas, legislation is already being drafted to restrict the use of ESG criteria. House Bill 645 would prohibit financial institutions from using what it calls “value-based criteria” in their business practices. For example, it says that banks cannot discriminate against or defend a person based on their activity on social networks, political affiliation or ESG standards. The legislation is likely to be among a plethora of proposed bills in Texas, some possibly more political than practical, that focus on environmental or social policy.
Oklahoma lawmakers will consider a bill introduced by state Sen. Casey Murdock that would prohibit government entities from contracting with companies that have restrictive firearms policies, according to the state’s legislative website. The move follows a nearly identical 2021 Texas law, which temporarily stopped a handful of banks from writing municipal bond deals in the state.
With the new Congress split between a Republican-controlled House and a Democratic-controlled Senate, anti-ESG legislation is likely to go nowhere in Washington for the next two years. But that doesn’t stop members of the Republican Party from making proposals.
In the US Senate, five Republicans, including Tom Cotton of Arkansas and Marsha Blackburn of Tennessee, wrote a letter in November to dozens of law firms perceived as supporting ESG strategy that they say Congress plans to use its supervisory powers to see if antitrust violations are “engaging on behalf of ESG”.
And US Rep. Andy Barr of Kentucky, a top Republican on the House Financial Services Committee, has said that he and his colleagues will “exercise rigorous oversight of both industry regulators and asset managers.” that have politicized capital allocation that hurts American workers, retirees, and discriminates against American energy producers.”
Last March, Barr and US Congressman Rick Allen of Georgia introduced the Sound Guidance (ESG) Act to separate the investment and retirement accounts of retail investors from asset managers who put environmental and social goals ahead of returns. The proposed bill is likely to be pushed through again next year.
As the anti-ESG campaign rages, some pension officials and banking groups in Republican-dominated states began last year to question the GOP’s claims that ESG is bad for investors. For example, the idea that BlackRock, one of the largest shareholders in fossil fuel companies in the world, puts sustainability before profit has been challenged by John Broussard, deputy state treasurer and chief investment officer for Louisiana, a state with lots of fossil fuels. industry footprint.
After reading BlackRock CEO Larry Fink’s 2022 letter to corporate executives, Broussard concluded that what Fink is “really talking about is the investment opportunity this move represents,” according to copies of emails. compiled by the watchdog group Documented.
Broussard noted that the public debate on ESG did not reflect Fink’s words.
In the letter, Fink said, “BlackRock does not pursue divestment from oil and gas companies as a matter of policy.” He added that “forward-thinking companies in a wide range of carbon-intensive sectors are transforming their businesses and their actions are a critical part of decarbonising. We believe that companies leading the transition present a vital investment opportunity for our clients and that driving capital into these phoenixes will be essential to achieving a net zero emissions world.”
Broussard wrote in a January 25 email to the Louisiana state treasurer that “it is surprising how much the actual letter differs from so many news reports about the letter.” Through a spokeswoman, he declined to comment on the emails.
Broussard’s emails did little to stop the GOP’s intent to vilify ESG and make an example of BlackRock. In October, Louisiana decided to withdraw nearly $800 million in state funds from the asset manager, claiming that the company’s “blatantly anti-fossil policies would destroy the Louisiana economy.” The move came despite the fact that BlackRock is among the world’s largest investors in oil giants, including Exxon Mobil Corp. and Chevron Corp., largely through its index-tracking funds.
In Kansas, Alan Conroy , executive director of the state’s Public Employees Retirement System, raised concerns in March about a state bill that would bar retirement plans from hiring companies that avoid fossil fuels. He wrote in an email that passing the law would cost the pension as much as $82 million a year, according to Documented, which collected copies of the emails. The bill ended up being rejected. A spokeswoman for the Kansas Public Employees Retirement System, which manages about $20 billion, declined to comment on the emails.
And in one of the first legal actions taken against ESG critics, a Kentucky banking group sued Daniel Cameron, the state’s attorney general, in October, accusing him of exceeding his authority when he launched an investigation into ESG use by of the Wall Street banks. factors The Kentucky Bankers Association said the attorney general was exceeding his powers, acting outside his jurisdiction and “wasting and misspending taxpayer funds in his improper efforts to do so.” The attorney general has filed a motion to dismiss the lawsuit.
Josué Lichtenstein, a partner at the New York law firm Ropes & Gray LLP, said such litigation can curb some of the more dubious Republican legislative attacks on ESG. “Lawsuits like this will make red states smarter and more precise about what they are trying to restrict,” he said.
The reality is that roughly 20 of the 35 anti-ESG-related bills introduced over the past two years have not become law, according to estimates by the New York law firm Debevoise & Plimpton LLP. Given the success rate, it will be interesting to see in the future whether Democratic-led states press asset managers to keep their ESG commitments in the face of criticism from the Republican Party, Ropes & Gray’s Lichtenstein said. “In 2022, the pressure was more one-sided, but that may not hold up in 2023 and beyond,” she said.
Andy Puzder, an adviser to former President Donald Trump who helped shape some of the bills to be introduced, said he would be happy if five of the bills he worked on became law in 2023.