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October 3, 2022

Mapped: The polarisation of ESG in the US

In case there was any doubt, it is now clear: sustainable investing and exclusion policies are firmly embedded in the US’ ongoing culture wars.

By Elizabeth Meager

US ESG war
At war with itself? The US culture war has engulfed ESG along with it. (Photo by Dmitry Mayatsky/Shutterstock)
  • Lawmakers in 31 US states have moved to introduce anti-ESG legislation in recent months, with the backlash concentrated in Republican states.
  • This leaves little doubt that sustainable investing is caught in the increasingly vicious culture wars in the US.
  • Commentators argue that the absence of such laws is an affirmative statement because to so many, considering ESG factors is just measuring risk.

In recent years lawmakers in dozens of US states have sought to introduce new legislation that either supports or restricts the use of ESG principles in investing. The divides run fairly clearly along party lines, according to Capital Monitor analysis, with the most staunchly Republican states most likely to introduce anti-boycott bills, and the more left-leaning – mostly coastal – Democrat strongholds enshrining ESG principles in law.

Capital Monitor mapped out all the US states where ESG-linked bills have been introduced, their status and whether they fit into a broad pro or anti-ESG camp. Out of the 17 Republican states, all introduced bills against integrating ESG principles into investment decision making. Eleven of the 14 Democrat-leaning states put forward bills in support (see chart below).    

The rapid growth in anti-ESG policies since the start of 2022 alone leaves little room for doubt: ESG investing is a clear target of the ongoing culture wars in the US, joining critical race theory, trans rights and Covid masks. It would now appear to be ‘woke’ for fiduciary managers to take major risks into account.

The ESG crusades

The laws introduced vary slightly between states, but there are clear themes. On the anti-ESG side, most take the form of anti-boycott initiatives that restrict state entities from doing business with financial institutions that have exclusion policies for fossil fuels or firearms.

Lawmakers argue that these policies are anti-free market and/or damaging to local industries. Seventeen Republican-leaning states including Indiana, Kentucky and Oklahoma have introduced such laws, almost all since the start of this year.

Some meanwhile have aimed even wider, with Arizona, Idaho, Indiana, Florida and North Dakota all specifying that public entities may not do business with institutions that consider ‘non-pecuniary’ factors, such as environmental or social elements, in investment decisions (see below chart).

The irony is such laws are a form of boycott. As billionaire Democrat nominee Michael Bloomberg wrote in early September:

“These anti-ESG crusaders position themselves as defenders of the free market. But they are attempting to use government to block private firms from acting in the best interests of their clients, including retired police officers, teachers and many others who depend upon public pensions. And in doing so, they are turning the most basic investment rules on their head.”

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Is anti-ESG winning?

While some states have enshrined ESG principles in law, an absence of pro-ESG policies is not particularly meaningful, says Dave Wallack, executive director of For the Long Term, an initiative working with public treasurers seeking to counter the anti-sustainability rhetoric emerging from some Republican states.

Democratic strongholds including New York, Vermont and Washington State have not introduced pro-ESG laws, but there is little doubt that fiduciaries in those states are expected to consider ESG risks.

“For many, debating whether climate change is a financial risk is like debating gravity – climate change is self-evidently a material risk over the long term. There’s a lot of evidence for that,” Wallack says. “So I would say actively avoiding passing an anti-ESG law is basically an affirmative statement, because you don’t need a pro-ESG law to use ESG principles. ESG investing is a third of the market.”

This view is seconded by the New York-based head of sustainable finance at a major bank. “I view this as governors thinking about their presidential ambitions more than the welfare of their pension funds,” he says. “The idea of not taking ESG factors into account is just silly – everybody has considered those risks forever. It’s just a great way of pointing the finger at the other guys and saying ‘they’re trying to hurt you. Vote for me’.”

“We’re not saying that we have the answer to how we should handle the climate or any of the range of factors that make up ESG, but we are very clearly saying that you’re not doing your job if you’re not considering information that can help you make better decisions,” said Tobias Read, state treasurer for Oregon ($85bn AUM).

Fighting the tide?

While all states that have introduced anti-ESG laws are Republican, not all Republican states have or plan to introduce anti-ESG laws.

“This is about a small number of Republican officials trying to push against the market as a whole, and it’s not just us pushing back – there is a broad coalition,” Read says, pointing to former Republican officials that have come out against such laws, including Paul Atkins, former SEC commissioner. “I can see why it’s a politically effective position, but from the standpoint of people actually trying to run businesses or make investments, it’s not really defensible.”

While the impact of such policies is technically limited to business with state entities, the concern is that such actions will have a wider chilling effect. Around $3.4trn of public retirement money is invested in line with ESG principles across the US, though most of that resides in states that have either said nothing on the subject or have actively encouraged fiduciaries to consider ESG risks.

Not known for their tree-hugging, Texas recently banned BlackRock, Goldman Sachs and JP Morgan – three of the biggest fossil fuel financiers in the world – from working with state entities.

As Capital Monitor reported in July, asset managers are already reluctant to discuss their environmental, social, and governance efforts on the record “primarily because of the political issues in the US”.

“A blacklist doesn’t only impact the behaviour of the people that are blacklisted – everyone starts worrying about it,” says Wallack. “Fear of the blacklist impedes the free flow of information necessary for an efficient market.”

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