Investors spooked by ESG political backlash in the US

Keeping quiet on climate: Aggressive Republican pushback against ESG is having a chilling effect. (Photo by Arman Zhenikeyev via Corbis / Getty Images)

Certain Republican lawmakers have launched legislative attacks on asset managers and banks they deem to be engaging in ‘woke’ business practices.
At least 44 new bills have been tabled since the start of this year targeting institutions for anything from their fossil fuel exclusion policies to providing diversity training.
Republican legislators are also fighting against the Securities and Exchange Commission’s climate disclosure proposal, which is broadly supported by investors.

From snow storms in Texas to wildfires in California to hurricanes in Louisiana, America’s vulnerability to the extremes of climate change is starkly clear. In 2021 alone the US spent $145bn dealing with the fallout from natural catastrophes, according to the National Oceanic and Atmospheric Administration. Preparing for such risks is widely accepted as good business sense.

Yet despite growing global acceptance of this fact, a sizeable faction of US legislators is doubling down on its resistance to climate-related policies as part of wider opposition to the concept of ESG, at both state and federal levels. A recent major blow was struck on behalf of the anti-sustainability lobby with the late June ruling by the US Supreme Court to limit the ability of the Environmental Protection Agency to reduce greenhouse emissions.

Amid this increasingly aggressive pushback on ESG, fear of partisan reprisals is having a dampening effect on investor support for environmental and wider sustainability issues.

State-level opposition to ESG

The politicisation of environmental and social issues in the US is not new, but it has intensified considerably in recent months. Since the start of this year, Republican lawmakers have tabled at least 44 new bills across 17 states that would penalise a range of sustainability or ethics-driven business practices.

Proposals include banning state entities from working with banks that have restrictions on lending to fossil fuels or guns (in Texas) or limiting companies’ ability to provide diversity training (in Florida). Companies offering employees access to abortion in states that have outlawed it look to be next in the firing line.

Despite Republican politicians often railing against cancel culture being imposed by the ‘woke left’, it seems some in the party are doing their best to shut down arguably fairly innocuous and reasonable business practices.

State-level efforts to block ESG investing are still in their infancy. But given the considerable opportunity presented by US municipal bond markets, they have the potential to drive business decisions in future.

For example, Texas passed various laws last year banning municipalities from contract with banks with certain ESG-related business practices. These policies have been imposed at substantial expense to the state: a recent study found that the exit of five of the largest bond underwriters from the state will cost public entities an additional $303m to $532m in total interest in the first eight months of the laws being in place.

Several major companies headquartered in Texas – including American Airlines, AT&T and Oracle – did not respond to requests for comment on such state-level initiatives.

Climate disclosure in crosshairs

And then there is the Securities and Exchange Commission’s (SEC) plan to mandate that companies report on the risks posed to them by climate change. Investors are broadly supportive of the proposal, which would bring the US in line with several other major economies, including the EU and UK.

But many Republican lawmakers are incensed by the plan, and indeed some intend to challenge it in court. Last month, 24 Republican attorneys general – including those of the states of Alaska, Georgia, Idaho, Texas and West Virginia – sent a 42-page letter to the SEC, arguing that its plans constituted “agency mission creep of the worst kind” and were an “ill-advised misadventure into environmental regulation”. Big corporate trade associations have also voiced their opposition.

While net-zero scepticism exists in political circles everywhere, this kind of public rhetoric sets the US apart from Europe.

Aron Szapiro, head of retirement and public policy at fund research house Morningstar in Chicago, says: “When I talk to my colleagues in Europe on ESG and particularly climate risk reporting, the question tends to be ‘why aren’t you doing this?’ Whereas in the US, the question is ‘why are you [doing this]?’ It’s slowly changing, but this has become a hugely partisan issue, particularly of late.”

All quiet on the climate front

Financial institutions are increasingly acknowledging that climate change is a financial risk, but they seem less willing to do so openly against this increasingly polarised political backdrop.

The division head at a big US asset manager tells Capital Monitor that her firm was being particularly careful about public commentary on climate “primarily because of the political issues in the US”.

The fund house is “very mindful” to keep out of the public domain any comments in favour of regulation that would support the transition to net zero, the executive says. “On one hand we’ve got Green [members of the] European Parliament yelling from one direction, then Republicans in the US pulling us in the other. We’re deep in those conversations around what we can and can’t say at the moment.”

Her words demonstrate the fine line many asset managers are walking as they try to appease both sides of the widening political spectrum. Targeted by Texas legislators last year for being ‘woke’, BlackRock has issued a series of memos trumpeting its support for the oil and gas industry, while elsewhere playing up its support for climate action.

Greenwashing worries

Another deterrent to pushing a sustainability agenda is rising regulatory scrutiny of potential greenwashing. Watchdogs in various jurisdictions have been cracking down on claims made by fund managers about their environmental credentials that are seen as inflated.

The SEC, along with German regulator BaFin, launched its first such investigation into German asset manager DWS last August, culminating in a raid of its offices and the resignation of chief executive Asoka Woehrmann. The investigation is ongoing.

One New York-based fund management executive says she has heard in-house counsels at investment firms saying they are “keeping a low profile” on ESG for now as they do not want to make themselves potential targets for an SEC audit.

This could even mean avoiding doing something seemingly innocuous and arguably even in line with regulatory requirements.

“It is a consequence for asset managers that want to be supportive of the climate disclosure rule: putting in your public comment letter that you use climate data potentially puts you on the SEC’s radar screen,” she adds.

Accordingly, most individuals who spoke to Capital Monitor for this story did so on the condition of anonymity, citing the highly polarised political environment in the US, which is only set to escalate as the country approaches the mid-term elections this November.

Some staying on track

Nonetheless, some institutions are sticking to their ethics regardless of the political landscape, revealing divisions between church and state on such issues. In early July, the country’s largest Presbyterian church group announced it would divest from five national energy companies over their failures to adequately address climate change. The decision follows a years-long but ultimately unsuccessful engagement campaign.

Indeed, some observers are optimistic that conservative moves to scupper efforts to address climate change and certain social issues are doomed to fail.

One New York-based environmental lawyer says these anti-ESG efforts are like “the boy trying to hold back the water with his thumb”. “Bullying won’t change the need for companies to work towards preserving a stable environment for their operations and customers,” he says.

A Boston-based corporate board adviser with a focus on sustainability agrees: “If the SEC does not mandate climate disclosures, for example, the US will just be left behind – and besides, so many of these companies are global that they have to do it anyway.”

Investors will hope this is the case. Yet much of the Republican party still appears in thrall to former president Donald Trump and his voter base – neither of which are known for their progressive stance on climate or social issues. And with Trump’s stacking of the Supreme Court with conservative judges for their lifetimes, help seems unlikely to come from that quarter for years to come.