Republicans in state capitals across the country are targeting an investment concept known as environmental, social and corporate governance criteria, or ESG for short.
GOP officials describe these investment criteria as “woke” and “misguided activism,” arguing that by considering these factors when making investment decisions, financial institutions are putting ideology ahead of money-making.
Experts on these investment criteria say it’s the other way around, and that Republicans are losing money for their constituents by unnecessarily restricting the options of the financial institutions the state does business with.
Nineteen Republican attorneys general wrote a letter in August to BlackRock, the world’s largest wealth manager, which insiders say has $10 trillion under management. The letter accuses BlackRock of making decisions based on its alleged political agenda rather than the welfare of state pensions.
“A governance engagement strategy that focuses primarily on BlackRock’s climate agenda necessarily overlays ESG factors on the core index portfolios that make up a significant portion of many government pension funds,” the attorneys general said in their letter. They added: “BlackRock’s commitment to the financial return on state pensions should be undivided.”
Attorneys general in Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Louisiana, Missouri, Montana, Nebraska and Ohio were among those who signed the Aug. 4 letter.
In response, BlackRock called the Attorneys General’s statements inaccurate, writing, “We are concerned by the emerging trend of policy initiatives that sacrifice pension plans’ access to quality investments – thereby jeopardizing the financial returns of retirees.”
The same group of attorneys general, along with Virginia’s AG, have joined an investigation by Missouri Attorney General Eric Schmitt into whether Morningstar, a financial services company, violated consumer protection laws in evaluating the company’s performance on ESG issues.
Missouri Treasurer Scott Fitzpatrick, along with 14 other GOP state treasurers, threatened to remove their state’s assets from banks that “refuse to lend to or invest in coal, oil and natural gas companies.”
“Attempts to pressure financial institutions to cut off the fossil fuel industry,” Fitzpatrick said at the time, ” amount to nothing short of an abuse of power by the federal government and should not be tolerated by states.”
Fitzpatrick later defended his leadership role at a nonprofit that a New York Times investigation found is working to penalize companies trying to reduce greenhouse gas emissions.
The Republican Governor of Florida, Ron DeSantis, has also taken on the issue. On August 23, he successfully pushed through a ban on taking ESG criteria into account when investing in state pension funds.
DeSantis said of his win over ESG investing, “We reaffirm the authority of Republican governance over corporate dominance, and we prioritize the financial security of the people of Florida over whimsical notions of a utopian future.”
But Witold Henisz, vice dean and faculty director of the ESG initiative at the University of Pennsylvania’s Wharton School, said such policy developments are bad news for taxpayers in those states.
“When states say they can’t do business with financial institutions that take climate risk and other ESG factors into account, that means they don’t do business with the largest and most advanced financial institutions in the US and the world, which means they have to issue bonds and interact with smaller financial institutions, which have fewer economies of scale and scope and therefore charge higher fees,” he said.
According to Deloitte, by 2024, half of all professionally managed assets worldwide will be invested in companies that take ESG issues into account. BlackRock has seven of the top 10 ESG funds, according to Barrons, and its ESG-integrated portfolios comprised $2.9 trillion in assets, according to its 2020 Sustainability Report.
A 2021 Responsible Investment survey by Nuveen, a wealth manager, found that 75% of employees strongly agreed or tended to agree that employers who offer ESG and responsible investment options care about their retirement outcomes.
The Securities and Exchange Commission’s investor resource notes that the environmental component of such investment strategies “might focus on a company’s impact on the environment or the risks and opportunities associated with the impact of climate change on the company, its business and its industry are connected”. The social criteria can relate to human rights issues or labor rights, and governance has to do with the behavior of the company.
Alison Taylor, executive director of Ethical Systems at New York University, said that climate issues, which Republicans are most critical of when discussing ESG investing, are actually one of the better factors to consider when making those investment decisions.
“Depending on the issue, there is more or less a ‘business case,’ more or less evidence that that issue will affect the organization’s bottom line,” she said. “Now that everyone has landed is climate change. I think this is problematic for the Republican position because there are some of these issues where there is mixed evidence or there isn’t as much evidence that the issue will have a dramatic impact on the bottom line over the long term. But climate is certainly an issue where there is a lot of evidence that if you don’t manage climate risk now, there will be adverse long-term financial implications.”
North Carolina and Texas politicians have also spoken out about ESG investing. Texas Comptroller Glenn Hegar (R) has banned several financial firms from entering into contracts with his state, meaning Texas pension funds can no longer work with big companies like BlackRock, UBS Group AG and Credit Suisse Group AG. Hegar said he decided to focus on banning companies that “boycott energy companies” in his Aug. 24 announcement of the decision.
Hegar said government agencies must notify his office no later than 30 days after viewing the banned companies list of financial firms in which they have interests. They must also “submit to the Speaker of each House of the Legislature and the Attorney General an annual report identifying all securities sold, redeemed, disposed of or retired under the Texas Government Code.”
Texas has been investing in ESG for some time.
Wayne Christian, a Republican on the Texas Railroad Commission, which regulates oil and gas, criticized ESG in January 2021 as potentially harmful to energy employment, according to Bloomberg. In May 2021, he said the SEC should protect oil and gas companies from ESG investing, the outlet reported. The following month, Texas Gov. Greg Abbott signed legislation requiring the state’s pension funds to divest, sell, retire and buy back companies he characterizes as boycotting energy companies.
North Carolina State Treasurer Dale Folwell, who manages the state pension fund, has also criticized ESG investing, telling top1000funds.com that the pension fund will take a different approach to environmental factors by voting by shareholders rather than through asset manager proxy voting.
“We do not want our authority to be used to promote policies unrelated to our fiduciary responsibilities; Using these assets and voting on these assets in a manner contrary to our fiduciary responsibilities is what we will no longer do,” said Folwell, who has been criticized for his financial decisions in the past.
Taylor said she sees Republican efforts to attack ESG investing similar to Republican focus on critical race theory, in the sense that policymakers are adopting a concept that many Americans were unfamiliar with and using it to their advantage used to achieve specific political goals.
“You can think of ESG as an attempt to bring critical race theory into the private sector,” she said.
Taylor added, “This stuff is shaky and technical and it’s really controversial and a lot of people use the term in different ways. It’s exploiting a bit of a misconception, and I think they’re hoping that people will say, ‘Well, Disney really overdid it.'”