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February 16, 2023updated 17 Feb 2023 10:27am

The ESG culture war tantrums

Democrats and Republicans are closer on ESG than the name-calling suggests, while SEC disclosure proposals are moving the US towards global harmonisation.

By Adrian Murdoch

ESG, US culture war
A mean stare. US politicians are fuming over ESG, but some believe it’s more theatre than war. (Photo by Joe Millington via Shutterstock)
  • Republicans have lined up a legislative agenda to rein in the use of ESG factors as part of the investment process.
  • Although Republicans did not vote for Joe Biden’s Inflation Reduction Act, all states and congressional districts will benefit from its provisions.
  • Proposed climate risk disclosure rules from the Securities and Exchange Commission will help move towards international standards.

Earlier this week [13 February], Florida Governor Ron DeSantis upped his campaign against what he called “the woke agenda” and proposed legislation that would stop the use of ESG considerations when issuing municipal bonds.

“We’re also finally going to make sure that ESG is not infecting other decisions at both the state and local government [levels],” he said at a press conference on Monday.

The attacks on ESG in the US appear to be multiplying, not helped by the many ESG funds that underperformed last year – thanks to high oil prices. Net inflows to ESG exchange-traded funds (ETF) slumped from $36bn in 2021 to $2.9bn last year, according to Bloomberg, and the sharks can smell blood in the water.

Republicans have lined up a series of bills that they plan to launch by the summer to reign in the use of ESG factors as part of their investment process. House financial services committee chairman Patrick McHenry has made it clear he wants to “end the politicisation of our financial system”.

The rhetoric – on both sides – is alarming. “Republicans have very suddenly awakened to the momentum toward climate risk reporting and the popularity of so-called ESG investing, and dramatically stepped up their counteroffensive accordingly…This is a closely coordinated political effort driven by a network of dark money organisations fronting for climate denial groups and fossil fuel interests,” wrote Democrat senators Sheldon Whitehouse, Brian Schatz and Martin Heinrich in an article in mid-January.

Closer than you think

But despite the column inches devoted to partisan warfare, attacks on ESG are unpopular with voters on either side.

In a December survey of registered voters and 18 congressional offices conducted by Penn State’s Center for the Business of Sustainability and communications firm ROKK Solutions, more than three-quarters (76%) across political lines agreed that companies should be held accountable to make a positive impact on the communities in which they operate.

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Behind the name-calling, the two parties are not as far apart as is sometimes suggested.

The toddler tantrums are what Gregory Hershman, head of US policy at UN-supported Principles for Responsible Investment, tells Capital Monitor are “only a small percentage of the real conversation that’s happening”.

“The fundamental underlying demand [for sustainability] is there and that hasn’t changed. If anything, it’s accelerating,” he says.

Key is the Inflation Reduction Act (IRA), a $369bn package of climate investments passed by US President Joe Biden last summer, which will support homeowners with the purchase of electric vehicles and energy-saving appliances.

“Regardless of what you may think about climate change, or the pace of climate change and climate risk, the IRA shows that the pace of the transition to a low carbon economy is happening rapidly,” Hershman says.

Aniket Shah, global head of ESG strategy at investment bank Jefferies, agrees. He pointed out in a note at the end of January: “[T]here is consensus around the energy transition”.

Although Republicans did not vote for the IRA, Republican states and congressional districts will, he says “benefit significantly” from the provisions. Adding up solar, wind and battery capacity in the top ten districts for each technology, Republican districts account for 86% of the total.

“There’s a tonne of investment that we’re already starting to see in battery factories in Ohio, South Carolina and a number of states,” says Hershman. “We’re just starting to see the sort of follow-on ramifications of this.”

Jobs are already being created. According to research from Washington-based industry association Advanced Energy United, more than 120,000 new clean energy jobs were created in the US already in 2021 [see chart]. The 2022 figures are expected to have ramped up dramatically after the Inflation Reduction Act.

SEC ESG reporting rules

The immediate challenge is the long-awaited climate risk disclosure rules from the Securities and Exchange Commission (SEC) which were proposed in March last year and, after a number of delays, Hershman reckons “to see a final rule in the first half of this year”.

The problem it is trying to address, as many countries have found, is too much data. “It’s not that we need more data, we need the data in the same way given the right way,” he says.

The SEC rules are an attempt to make sense of the mishmash of ESG standards and frameworks that are used. Not only will reporting be mandatory, the intention is for those reports to be verified by a third party.

No wonder Hershman calls the rules a “pretty big game changer”. Based on International Sustainability Standards Board (ISSB) criteria, he calls this a “huge first step” in codifying what is expected from companies on climate-related disclosures.

Although there might be slight differences in how standards are being pursued in different parts of the world are pursuing, it seems, as Hershman points out that “we are moving toward a global baseline”.

In this month’s Harvard Business Review, Daniel Crowley, who leads the global financial services policy practice at the law firm K&L Gates, and Robert Eccles, visiting professor of management practice at Saïd Business School, Oxford University, try to rescue ESG from the culture wars.

“The key will be returning ESG to its original and narrow intention – as a means for helping companies identify and communicate to investors the material long-term risks they face from ESG-related issues,” they wrote.

This is exactly what the SEC rules are. And with this very specific remit, there is a chance that they could avoid partisan politics.

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