GOP Launches Pushback Against ESG in Preparation for 2023

The Environmental, Social, and Governance (ESG) investing strategy is facing criticism and it appears unlikely that the opposition will dissipate anytime soon.

A number of Republican state attorneys general have expressed their disapproval of ESG financial practices, and Republicans in Congress are planning to increase their oversight of what they refer to as "woke capitalism". One of their primary grievances is that environmental, social and governance investing is part of a larger Democratic initiative to prioritize climate change and other social matters, which could be detrimental to the fossil-fuel industry.

The right has launched a political attack with the help of some of the Republican Party's most prominent figures, such as former Vice President Mike Pence and the governors of Florida and Texas, Ron DeSantis and Greg Abbott. Pence and DeSantis are thought to be potential presidential candidates in 2024. Peter Thiel and Elon Musk, two wealthy GOP supporters, have also expressed their disapproval of ESG. Additionally, a number of right-wing activists, including Leonard Leo, have spoken out against BlackRock Inc. and other Wall Street firms, accusing them of catering to the Democratic agenda.

Jill Fisch, a professor of business law at the University of Pennsylvania who has been studying corporate-governance issues for over 30 years, believes that the current political attack on the finance industry is unprecedented. She notes that there is a lot of money behind the scenes, with Big Oil being one of the major supporters of GOP candidates. Fisch believes that this issue is not going to disappear anytime soon.

States led by Republicans are resisting the implementation of Environmental, Social, and Governance (ESG) standards, while those led by Democrats are attempting to incorporate them.

This is a major setback for BlackRock, the world's biggest asset manager and a strong supporter of ESG. Florida and six other states have already declared their intention to withdraw their funds from the New York-based company.

The term ESG (environmental, social and corporate governance) was created almost two decades ago with the concept that investors should consider the environmental, social and corporate governance risks when making financial decisions. Currently, approximately $8.4 trillion is invested in ESG-related products. However, Republican politicians such as DeSantis have argued that ESG "diminishes returns in favor of the select few, unelected corporate elites and their progressive agendas."

Governor DeSantis has put forth a plan for anti-ESG bills that Florida legislators are likely to debate in their upcoming session in March. The proposed laws would forbid state money managers from taking ESG factors into account when investing. Additionally, Florida's Chief Financial Officer, Jimmy Patronis, has removed $2 billion from BlackRock, the largest anti-ESG withdrawal by any state, and has suggested that the state's investment arm discontinue working with the firm, implying that more withdrawals may occur.

In Texas, a bill has been proposed to limit the use of ESG criteria. House Bill 645 would forbid financial institutions from utilizing what it calls "value-based criteria" in their operations. This would mean that banks would not be able to discriminate or support someone based on their social media activity, political affiliation, or ESG standards. This legislation is likely to be one of many bills proposed in Texas that are more politically motivated than practical, and that target environmental or social policies.

Oklahoma state Senator Casey Murdock has proposed a bill that would prevent government entities from doing business with companies that have restrictive gun policies, as reported on the state's legislative website. This follows a similar law passed in Texas in 2021, which temporarily blocked a few banks from participating in municipal bond deals in the state.

Given the current political divide between the Republican-led House and the Democratic-controlled Senate, it is unlikely that any anti-ESG legislation will be passed in the next two years. Nevertheless, Republican members are still introducing such proposals.

In November, five Republicans in the US Senate, including Tom Cotton of Arkansas and Marsha Blackburn of Tennessee, sent a letter to numerous law firms that were thought to be aiding the ESG strategy. The letter stated that Congress was going to use its oversight powers to investigate if any antitrust violations were being committed in the name of ESG.

US Representative Andy Barr of Kentucky, a prominent Republican on the House Financial Services Committee, has declared that he and his fellow committee members will be closely monitoring both regulators and private sector asset managers who have used capital allocation in a way that harms American workers, retirees, and discriminates against US energy producers.

In March of last year, Attorney General Barr and US Congressman Rick Allen of Georgia proposed the Ensuring Sound Guidance (ESG) Act. This bill was designed to separate retail investors' retirement and investment accounts from asset managers who prioritize environmental and social goals over returns. It is likely that this bill will be reintroduced in the coming year.

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In the past year, some pension officials and banking groups in Republican-dominated states have started to challenge the Republican Party's assertions that ESG is detrimental to investors. For instance, John Broussard, the assistant state treasurer and chief investment officer for Louisiana, has argued against the notion that BlackRock, one of the world's largest shareholders of fossil-fuel companies, prioritizes sustainability over profits. Louisiana is a state with a large fossil-fuel industry presence.

Broussard came to the conclusion that Larry Fink, the Chief Executive Officer of BlackRock, was referring to the investment opportunity presented by the 2022 letter he sent to corporate executives, as evidenced by emails collected by the watchdog group Documented.

Broussard noted that the discussion surrounding ESG did not align with Fink's statements.

In a letter, Fink stated that BlackRock does not have a policy of divestment from oil and gas companies. He further noted that companies in carbon-intensive sectors are making changes to their businesses, which is a key part of decarbonization. He believes that investing in these companies is a great opportunity for their clients and is necessary to reach a net-zero world. Broussard commented in an email to Louisiana's state treasurer that the letter was different from many news reports about it. He declined to comment further on the emails through a spokeswoman.

In the past five years, there has been a dramatic increase in the number of times ESG has been mentioned in the media on a monthly basis.

Despite Broussard's emails, the GOP continued to criticize ESG and make an example out of BlackRock. In October, Louisiana removed almost $800 million in state funds from the asset manager, claiming that its "anti-fossil policies would damage the state's economy." This was done despite the fact that BlackRock is one of the world's largest investors in oil companies such as Exxon Mobil Corp. and Chevron Corp., mainly through its index-tracking funds.

In March, Alan Conroy, executive director of the Kansas Public Employee Retirement System, expressed his concerns about a proposed state bill that would have prohibited the retirement plan from hiring firms that do not invest in fossil fuels. According to Documented, Conroy wrote in an email that the passage of the law would have cost the pension up to $82 million annually. Ultimately, the bill was rejected. When asked to comment on the emails, a spokeswoman for the Kansas Public Employees Retirement System, which manages around $20 billion, declined to do so.

In October, the Kentucky Bankers Association took legal action against Daniel Cameron, the state's attorney general, for his investigation into Wall Street banks' use of ESG factors. The association argued that Cameron was overstepping his authority, acting outside his jurisdiction, and wasting taxpayer funds. Cameron has since filed a motion to dismiss the lawsuit. Joshua Lichtenstein, a partner at Ropes & Gray LLP in New York, believes that this type of litigation may limit the more extreme Republican legislative attacks on ESG. He stated, "Lawsuits like this will cause the red states to get smarter and more precise about what they try to restrict."

It is estimated that only 20 out of the 35 anti-ESG-related bills introduced in the past two years have become law, according to law firm Debevoise & Plimpton LLP in New York. Ropes & Gray's Lichtenstein commented that it will be interesting to observe if Democrat-led states will continue to push asset managers to adhere to their ESG commitments despite GOP criticism. He added, "In 2022, the pressure was more one sided, but that may not hold in 2023 and beyond."

Andy Puzder, a former adviser to President Donald Trump, expressed his enthusiasm for the potential of five of the bills he helped shape becoming law in 2023.