A groundswell of Republicans in states across the U.S. are waging a war against environmental, social and governance (ESG) investing, framing the fight against the economic strategy as a stance against what they call liberal policies interfering in the free market.
Prominent GOP figures including former Vice President Mike Pence and Florida Gov. Ron DeSantis, both potential 2024 contenders, have latched onto the issue.
But so have state-level Republicans, who are implementing restrictions that blacklist certain firms from doing business with their state, usually because of what they perceive as unfavorable stances toward an industry that is the main driver of the global crisis of climate change: fossil fuel.
“I am leading the charge on this, but there is an army behind me,” West Virginia State Treasurer Riley Moore said in an interview with The Hill.
In July, Moore barred five of the largest banks in the country, including BlackRock and Goldman Sachs, from receiving state banking contracts. He says the banks are involved in “boycotts of fossil fuel companies” — a notion both companies denied.
Goldman touted in a letter to the state that month the more than $118 billion it had given to fossil fuel companies since 2016. A Blackrock spokesperson told The Hill the bank does not boycott energy companies.
“We disagree with Treasurer Moore’s determination,” the spokesperson said. “We do not pursue divestment from sectors and industries as a policy.”
Over the last two years, Republican lawmakers in at least 12 states have announced plans to introduce bills that aim to strictly curb ESG investing, ranging from the West Virginia-like practice of blacklisting banks to barring state money managers from considering ESG factors when investing.
ESG requires investors to make capital decisions based not only on likely financial return, but also with an eye on the company’s impact on the environment, wider society and its own employees.
The burning of fossil fuels, especially carbon dioxide, is the main driver of climate change, causing a worldwide crisis that is altering the earth’s ecosystems and is causing health problems for people as well as subjecting them to worse floods, droughts, food insecurity and sometimes death.
In May, the Securities and Exchange Commission proposed rule changes aimed at cracking down on what is known as ESG “greenwashing,” the misleading marketing of unsustainable investments under the ESG label.
The backlash goes beyond the state level.
House Republicans said they expect GOP lawmakers to overturn the agency’s proposed rule if they take the chamber after November’s midterms.
Rep. John Rose (R-Tenn.) and a bipartisan group of 117 lawmakers, mostly Republicans, sent a letter to SEC Chair Gary Gensler last month saying the new rules would place too great a regulatory burden on farmers to report the required data, potentially squashing small farms and worsening supply chain issues.
ESG investing has accelerated in the last decade, as banks have listed more and more funds under the category, capitalizing on the growing demand from investors.
Pence recently pressured states to curb the use of ESG investing factors at a speech in Houston in May.
“[Democrats] have weaponized the Securities and Exchange Commission… to choke off financing for traditional energy sources through capricious new ESG regulations that allow left wing radicals to destroy American energy producers from within,” Pence said during the speech.
DeSantis announced plans in late July to push Florida lawmakers to effectively ban the consideration of ESG factors when investing state money. This includes money in the state’s pension system.
“Our investment funds should be for the best interests of our beneficiaries… it should not be a vehicle to impose an ideological agenda,” DeSantis said.
While some states have smaller financial assets stowed away in state retirement funds, others have massive pension systems, according to Josh Lichtenstein, a partner at law firm Ropes & Gray. When these states make moves to regulate investments, the market goes on alert.
“When a state like Texas or Florida does something, or a state like California or New York … people pay more attention,” Lichtenstein said. “These are really significant and important institutional investors.”
But as state officials maneuver against ESG practices, experts warn the counterpunches may only muddy the waters more for investors and money managers. Some ESG factors, experts say, are conventional factors of risk for investors, and outlawing their consideration could make managing decisions difficult.
Lichtenstein believes there is a risk the new rules are interpreted so broadly that they actually shut down consideration of ESG factors all together. Asset managers have a duty to maximize return for investors, and Lichtenstein said the rules may mandate managers to ignore what they think are important sources of risk, a situation he deemed “untenable.”
But Moore and other Republicans categorically deny that environmental considerations mean anything when it comes to return on investment, asking, “How do greenhouse gas emissions affect the bottom line and financial outcomes of a given financial institution?”
Support for the fossil fuel industry is central to the Republican party’s concerns about ESG investing.
Utah State Treasurer Marlo Oaks, a critic of the investing strategy, said ESG has driven money away from fossil fuel projects in the U.S. He argues underinvestment in domestic energy projects has contributed to high energy costs.
“We have coercion happening in the capital markets to try and drive a political agenda,” said Oaks in an interview with The Hill. “The result is the misallocation of capital … underinvesting in oil and gas so we have a serious lack of supply.”
But climate activists are quick to point out that the banks continue to be major financial backers of fossil fuels. Ben Cushing, campaign manager of the Sierra Club’s Fossil-Free Finance campaign, said “Wall Street is the largest center of fossil fuel financing in the world.”
Cushing characterized the front against ESG investing as the GOP realizing that the free market is moving away from fossil fuels, with coal and oil company-backed politicians trying to stop the trend.
“This bizarre notion that banks are ‘boycotting’ fossil fuels is really just a talking point cooked up by right wing politicians and the fossil fuel industry to prevent the free market from moving against them,” Cushing said.
Republicans can claim some early victories on the issue. US Bank, which was originally on West Virginia’s blacklist, changed their lending policies to no longer boycott the fossil fuel industry, according to Moore.
US Bank’s ESG policies do not prohibit relationships with fossil fuel companies, according to a spokesperson for the bank. While it is “pleased to not be excluded from doing business in West Virginia,” its ESG policies were in place prior to the state’s law, the spokesperson said.
Some banks have even publicly trumpeted the amount of financing they have given fossil fuel companies, an attempt to convince state officials they have not gone too far in subscribing to ESG regulations.
And while Republicans have just begun their crusade against ESG, Moore is adamant there is more coming down the pike.
“I’m working with states all around the country … to get this legislation introduced in the next legislative session,” Moore said. “I think that it’s going to be a lot more palatable rolling into 2023 and you’re going to see a lot more states do this.”