In May, Mike Pence wrote a scathing op-ed against the Environmental, Social, and Governance (ESG) movement in the Wall Street Journal. He railed against asset managers prioritizing investments in socially and environmentally responsible companies, saying the practice interferes with the free market and actively hurts fossil fuel companies. “ESG empowers an unelected cabal of bureaucrats, regulators, and activist investors to rate companies based on their adherence to left-wing values,” he wrote. The piece was a pivotal moment in a brewing political retaliation against ESG.
Since the start of the ESG movement about 20 years ago, critics and advocates alike have raised questions about ESG investing, which screens for impactful company policies with respect to the Earth, society, and corporate governance. There have been legitimate queries about investment returns and whether companies are actually achieving the social impacts they claim. But 2022 brought a new brand of backlash that’s purely political, painting ESG investing as “woke” and leading to red states divesting in funds and formulating anti-ESG bills. Experts don’t think this will considerably hurt a sturdy movement, but it could lead to some regulatory crackdowns—and political repercussions in 2024.
In today’s era, taking into account a company’s environmental and social activities is good investment practice, because ignoring them could create financial implications—say, from extreme weather events or weak diversity, equity, and inclusion (DEI) policies that result in lawsuits and the inability to retain workers. That appraisal of risk has always been the crux of investing. “Framing ESG as aligned with the pursuit of shareholder value [is] just basic capitalism, and what’s been going on for a long time,” says Elizabeth Pollman, a professor of business law at the University of Pennsylvania.
But the political diatribes are new. Republicans, many vying for 2024 recognition, have been coming out in force to claim ESG considerations are harmful to shareholders, interfere with capital markets, and unfairly malign energy companies. “The fact that investing has become politicized is pretty new,” says Witold Henisz, faculty director of the ESG Initiative at the University of Pennsylvania’s Wharton School. “And pretty disturbing, actually.”
Anti-ESG sentiment seems to be another way to galvanize support against the Democrats’ so-called “woke” agenda. For many, it appears an odd choice for a political battle. “Does the man and woman on the street in these red states really get riled up over ESG? I don’t think so,” says Bob Eccles, a professor of management practice at University of Oxford. “How this became a mobilizing theme like guns and abortion is somewhat of a puzzle to me, because it’s a pretty arcane thing.”
But Republicans—spurred by backers with fossil fuels interests—have painted the ESG movement as a liberal attempt to thrust perceived “coastal values” on the entire electorate, giving it the same treatment as critical race theory and the debate around transgender bathrooms. Those have become effective at riling up the base, even though their electoral success is debatable. Particularly triggering for some voters, Pollman says, could be the “S” in ESG, which reflects social initiatives like diversity and inclusion. The issue could also play well with climate change deniers.
Many of the claims that Pence and other Republicans have made show a fundamental misunderstanding, or intentional twisting, of ESG, as they equate risk consideration and impact investing with obstructing markets and discriminating against fossil fuel companies.
The reality doesn’t match up. Even BlackRock, the world’s largest asset manager, which has developed a strong ESG portfolio, still has an abundance of fossil fuel companies under its management. And it has stressed it will not divest from coal, oil, and gas entities.
Substantive or not, Republican leaders have acted. In August 2022, Florida governor Ron DeSantis eliminated ESG considerations from state pension investments, stating that decisions “must be based only on pecuniary factors” and not “social, political, or ideological interests.” In December, he announced the state would divest $2 billion from BlackRock; other states including Missouri, Arizona, Utah, Arkansas, and Louisiana have done the same or announced they plan to do so. At least 17 red states are going even further: proposing bills next year to punish Wall Street firms for ESG investing, many of which would bar state officials from conducting any business with any firms that they vaguely deem as fossil fuel boycotters.
But experts think this anti-ESG crusade is unlikely to affect the overall movement. “By any measure of the numbers, the ESG movement is not just winning,” Henisz says. “One of them has trillions of dollars, and one of them has billions of dollars. It’s like an NFL team playing a high school team.” Though evidence is mixed, ESG investments seem to maximize shareholder value, and appear to be smarter long-term investment decisions than fossil fuels or “vice stocks” like tobacco and arms manufacturers. Impact investing has surged by 40% in the past two years, and is expected to hit $53 trillion by 2025. “None of the things that are going on are going to affect the volume of flows to ESG,” Henisz says.
But there have been signs of some subtle shifts. In December, Vanguard, the second-largest asset management firm, pulled out of a net-zero alliance for asset managers. While this isn’t a major blow for ESG, Henisz says it’s a retreat from a position of leadership, which other firms may follow. “There’ll be a little bit more reluctance to put your neck out,” he says. If BlackRock, which handles around $10 trillion of assets, were to do the same, it could be more significant. But BlackRock has doubled down on its sustainability commitments, boasting a “tectonic shift” toward sustainable investments, which it reports have reached $4 trillion.
Next year, the new Republican-majority House plans to hold hearings on ESG and question asset managers on whether it harms shareholders and violates fiduciary duty and antitrust laws. If those hearings are constructive (an open question, given the incoming leadership), they could actually be beneficial for ESG advocates, Eccles says, in achieving a more streamlined definition of the movement. But more likely, they will be political theater and could ultimately lead to looser regulations that let companies be less stringent in their impact reporting, which would be a blow to ESG advocates.
On the campaign trail, distorting the issue into one of “wokeness” may work, too. Henisz expects ESG to be a key policy issue for presidential hopefuls like DeSantis, Pence, and Mike Pompeo, and it could theoretically swing some votes in battleground states.
Still, the harshest effects of GOP actions would likely be on ordinary citizens in those red states. If governors divest in larger financial institutions that consider ESG risks, states will be forced to turn to smaller banks that aren’t assessing them, which may leave pension funds with a disproportionate number of fossil fuels, likely not financially viable in the long run. “It could absolutely hurt returns,” Eccles says.
Many of those small banks also charge higher fees. Texas was the first state to take legislative action against ESG, with a 2021 bill that prohibits municipalities from contracting with banks that have ESG policies, leading major banks, including JP Morgan and Goldman Sachs, to back out. Research showed that that bill has cost taxpayers between $300 and $530 million over six months. If other states follow, their Republican leaders could be racking up billions of dollars that taxpayers end up on the hook for.
The greatest irony is that Republicans’ retaliatory actions are achieving exactly what they accuse asset managers of: being political and obstructing the market. “They’re saying that ESG has interfered with market forces,” Eccles says. “The people that are interfering with market forces are Mike Pence and Ron DeSantis.”
(24)
