It has only been a decade since climate activists launched campaigns to get financial institutions and money managers to see that dollars pumped into the fossil fuel industry were a risk to both the planet and investor portfolios.
That effort has had some success but remains a work in progress. All of Wall Street now talks about environmental, social and governance (ESG) principles in investing, and that’s a problem. Claims of a commitment to that philosophy are ubiquitous among corporations and investment funds, and investors are left to figure out which declarations amount to mere greenwashing. Only within the last year have government watchdogs moved to set standards on what companies must disclose about climate risks.
Before those rules are set, Republicans have decided the time is right for an anti-ESG backlash. In 2023, they are preparing on multiple fronts to take on Wall Street, corporate America and U.S. financial regulators for, in their view, paying too much attention to environmental concerns and not enough to making money.
It’s “woke capitalism,” in the words of Florida Gov. Ron DeSantis, widely seen as a possible challenger to former President Donald Trump for leadership of the Republican Party. DeSantis’ administration announced last month that it was pulling out all Florida State Treasury funds—some $2 billion—that were invested with BlackRock, the Wall Street firm that has become most closely associated with ESG.
“We are reasserting the authority of republican governance over corporate dominance and we are prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow,” DeSantis said when he began his anti-ESG campaign last August. And Republicans are preparing to make much more noise about ESG, using the new platforms that they gained in the 2022 midterm elections:
- With Republicans in control of the House of Representatives, the congressman expected to head the Committee on Financial Services, Rep. Patrick McHenry of North Carolina, plans close oversight of the Securities and Exchange Commission (SEC) and its proposed climate-risk disclosure rules, which he sees as part of a “far-left social agenda.”
- Red-state attorneys general have signaled their readiness to go to court to challenge both the SEC and corporate and Wall Street ESG policies. Notably, they suggested in a letter to BlackRock last year that its activities with net-zero emissions groups raised antitrust concerns.
- The American Legislative Exchange Council, or ALEC, an association of state legislators that gets most of its funding from corporate sources and right-leaning foundations, is pushing for laws barring state pension funds from considering social and environmental factors in their investment decisions.
Republicans may not be able to turn back the ESG movement, which has taken such a firm hold that 90 percent of companies say they either have or are developing a formal strategy to manage corporate environmental, social and governance practices, according to the mutual fund research firm Morningstar. But the politicization of ESG could make it something like school textbooks, mask-wearing and Covid vaccines. Where investors stand on the nation’s political divide—and to a large extent, what state they live in—could determine whether their savings are exposed to the risks of climate change or the opportunities of the clean energy transition.
“This is clearly kind of a bizarre effort to open up a new front in the culture wars, and it’s really at odds with how the market works and the fundamentals of capitalism,” said Gregory Wetstone, president and CEO of the American Council on Renewable Energy. “They’re sacrificing other people’s financial well-being for their political agenda.”
It’s not surprising that ESG caught the attention of politicians, since sustainable investing has clearly moved from a niche market into the mainstream. The year 2021 was a watershed, with flows into ESG-focused mutual funds and exchange-traded funds rising 53 percent to $2.7 trillion, according to Morningstar. The trend slowed dramatically in 2022 with the market downturn, but Morningstar’s tracking showed that by the third quarter ESG funds were rebounding far more quickly than the rest of the funds market.
Bloomberg Intelligence projects that, even accounting for the recent slowdown, ESG assets under management will grow to $50 trillion by 2025 and account for one-third of all assets under management.
But clouding the future for ESG—and undermining its effectiveness as a driver in the clean energy transition—are unsupportable green claims by both companies and investment funds. Some companies and asset managers have faced enforcement actions in egregious cases of false statements to investors. Even more difficult for climate-conscious investors to navigate are the different definitions of ESG. BlackRock has become the favorite target of anti-ESG Republicans, but some environmentalists have not been happy with the asset management company’s approach, either. Some BlackRock energy transition funds can invest in fossil fuel companies, and the firm’s chairman and CEO, Laurence Fink, favors engagement within fossil fuel companies rather than divestment.
A Demand for Truth About Emissions Compliance
More than 70 percent of institutional investors believe there is a need for standardization and stronger ESG disclosure and regulatory requirements, according to a recent PriceWaterhouseCoopers survey. But the first proposed climate risk disclosure regulations for publicly traded companies in the United States, now pending before the SEC, will be one of the key targets for Republicans as they take control of the House of Representatives.
McHenry, who is expected to replace Rep. Maxine Waters (D-Calif.) as chair of the Financial Services committee, has been a vocal critic of the SEC proposal, which would seek to establish “consistent, comparable, and reliable” reporting of greenhouse gas emissions. Companies would also have to provide information to investors on how climate-related risks are likely to shape their strategies and business outlook.
Although McHenry has said he sees climate change as a real threat to communities, he does not think it is the SEC’s role to make climate policy. “The SEC should focus on its core mission—protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation,” he said.
Through hearings and subpoenas, Republicans will be able to pressure regulators and investment firms as well as showcase the narrative that ESG has harmed small investors. But because Democrats retain control of the Senate, the GOP will not have the power in Congress to derail the SEC’s plan to impose standards on climate risk disclosure.
That job may fall to Republican state attorneys general, who are poised to take the SEC to court once the rules are finalized. West Virginia Attorney General Patrick Morrisey, who won a Supreme Court ruling last year curbing the Environmental Protection Agency’s power to regulate greenhouse gas emissions, has said that the same legal principles should limit SEC climate action.
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Attorneys general also are zeroing in on what they say are the antitrust concerns raised by investment firms participating in coalitions like the Net Zero Asset Managers, a group formed in 2020 to support the global drive to reduce carbon emissions to zero by 2050. They argue that such efforts are preventing certain industries—primarily coal—from obtaining financing.
“If you have collusion between a large portion of the financial sector such that financing is only available to certain preferred industries, or if there’s proxy voting moving in a direction that’s functionally regulation, that is people with money deciding how the world is going to look,” said Tennessee’s attorney general, Jonathan Skrmetti, at an ESG forum hosted last month by the National Association of Attorneys General. “And that’s oligarchy.”
Just by raising the antitrust issue, the GOP AGs may have had an impact. Last month, the world’s biggest mutual fund manager, Vanguard, said it would leave the Net Zero coalition in order “to make clear that Vanguard speaks independently on matters of importance to our investors.” The move came days after Republican attorneys general filed an unusual challenge to Vanguard’s application before U.S. regulators to expand its holdings in utilities.
In addition to Florida, five other Republican-led states have pulled state Treasury funds out of BlackRock over ESG concerns. For BlackRock, it’s an insignificant $3 billion drop from its $7.9 trillion bucket of assets under management. But such moves could spread, especially with the ALEC-led campaign to change state laws to bar state pension funds from considering ESG factors in investing.
“I would say at least 25 state legislatures, maybe more, are going to consider votes on ESG bills in 2023,” said Kris Kobach, the Republican attorney general-elect of Kansas at the attorneys general forum last month. “This is probably one of the hottest topics in state legislatures right now.”
It’s not clear that the Republican politicians’ anti-ESG drive resonates with GOP voters. A recent survey of more than 1,200 voters by Penn State’s Center for the Business of Sustainability and the communications firm ROKK Solutions found that a majority of both Republicans and Democrats oppose restrictions on ESG investments. That’s not surprising, since sustainability initiatives at corporations are correlated with better financial performance, according to a review of more than 1,000 studies on the subject by researchers at New York University’s Stern Center for Sustainable Business.
But the anti-ESG moves now underway could mean less information for investors on what companies are really doing on the climate front, and less access to ESG options for pensioners in some states.
“What’s going on in the political arena is not just disappointing, it’s sad and it’s disruptive,” said Kristina Wyatt, senior vice president for global regulatory climate disclosure at the climate data firm Persefoni. She served as senior counsel for climate and ESG at the SEC in the first year of the Biden administration and worked on the agency’s climate risk disclosure proposal.
“There’s so much urgency to the climate crisis,” Wyatt said. “And investors deserve to have climate risks and opportunities associated with climate change properly factored into the investment decisions that are being made on their behalf.”