Sustainable investment practices are expected to be scrutinized more closely by the largest financial institutions in the United States. As a result of the midterm elections, major financial corporations are preparing for a renewed attack on sustainable investment initiatives, particularly if Republicans take control of both chambers of Congress.
Republican state officials — who have cut business ties with firms that they claim discriminate against fossil fuel companies as part of a “woke” agenda — will continue to discourage asset managers and banks from taking environmental, social, and governance factors into account when making financial decisions.
Republicans intend to capitalize on the momentum gained in states such as Texas, Louisiana, and West Virginia, where officials have withdrawn millions of dollars from BlackRock Inc. and other financial corporations. Candidates for a financial officer in Arizona, Florida, Illinois, Minnesota, and Kansas have taken stances on ESG, polarizing contests that seldom see political theater.
This is going to become worse, said West Virginia Treasurer Riley Moore, a Republican who is part of a coalition of 15 state treasurers attempting to punish financial corporations for allegedly shunning fossil fuels. Once we get to 2023, we’re going full throttle, Moore stated. You will hit critical mass regarding assets under management and capital that can be leveraged against the ESG movement.
If House Republicans get a majority, they will prioritize ESG, according to Rep. Andy Barr of Kentucky, a member of the House Financial Services Committee and the Republican Study Committee. This would imply more vigorous scrutiny of the SEC’s proposed climate disclosure requirement and a greater emphasis on climate risk at the Federal Reserve and other bank authorities.
“BlackRock, State Street, Vanguard, Invesco, and Fidelity are all fantastic firms,” Barr remarked in an interview. All we want is that they live up to their legacy of being great American enterprises and providing retirement security for Americans and that they cease this folly of politicizing capital allocation through ESG, Barr added.
The asset management businesses say they’re reacting to investor demand for information on possible risks from climate change and other economic hazards. They have a fiduciary obligation to seek the highest returns for their customers.
Perhaps no more prominent example of ESG adoption than BlackRock CEO Larry Fink declaring in 2020 that “climate risk equals investment risk.” Republican finance officers, on the other hand, are planning to use public funds more extensively to deter what they call political meddling.
Last year, Arizona Treasurer Kimberly Yee (R) withdrew state money from Ben & Jerry’s parent company, Unilever, when the ice cream company ceased doing business in Israel. She stated that she intends to implement her office’s new ESG investment policy if re-elected. The topic was crucial to her discussion with competitor Martin Quezada, a Democratic state legislator.
Yee said during an interview that she would keep fighting against a political agenda that undermines the foundation of a free market. “We cannot toy with taxpayer funds.” ESG regulations are hazardous because they prioritize politics above financial metrics.
The anti-ESG movement does not pose an existential danger to large financial institutions. Louisiana’s $794 million withdrawal from BlackRock, by far the most of any state, is a blip on the bottom line of the world’s largest asset manager, which had $8.5 trillion under management as of June 30. Furthermore, many divestments exclude public pension funds, the largest part of money managed by governments.
But it hasn’t stopped the firms from retaliating. BlackRock has launched a national ad campaign and a website outlining its approach to energy investments and climate change, stressing that it continues to invest more than $100 billion in Texas energy companies and $310 billion in energy firms globally.
A few states are on their way to one-party control, and the drama will ensue. BlackRock wrote in response to state attorneys general who questioned the firm’s commitment to achieving the best return for clients.
A study conducted by University of Pennsylvania finance professor Daniel Garrett found that Texas entities will pay an additional $303 million to $532 million in interest on the $32 billion in borrowing done in the first eight months after the implementation of two laws that prohibit municipalities from contracting with banks that restrict funding to oil, gas, or firearm companies.
The unfortunate thing is that the inhabitants of red states will pay the price for the political theater in high-interest rates on bonds and high risk for their pension nest eggs, according to As You Sow CEO Andrew Behar.
Meanwhile, opponents of ESGs are urging state legislators to give treasurers and comptrollers additional authority. A coalition of Republican state treasurers opposing ESG finance is led by Will Hild, the executive director of Consumers Research. In an interview, he stated that he expects 12 to 20 states to adopt legislation aimed at financial corporations’ ESG practices in the next six to nine months.
Such legislation might require pension fund administrators to base their decisions only on financial returns, similar to what Florida Gov. Ron DeSantis (R) accomplished. States might potentially pass legislation requiring public agencies to divest from firms accused of boycotting fossil fuels, akin to Texas, Kentucky, Oklahoma, and West Virginia laws.
South Dakota, Mississippi, and Nebraska are among the states most likely to take fresh anti-ESG action, according to the Heartland Institute, a nonprofit that rejects mainstream climate science. The American Legislative Exchange Council’s draft model policy on energy boycotting has already been submitted in previous legislative sessions in states such as Idaho and Indiana.
Moore of West Virginia suggested that state and federal regulators look into whether firms are violating antitrust laws by partnering on “net-zero” and ESG policies, using Climate Action 100+, an investor-led movement to reduce greenhouse gas emissions, as an example. They’ve already targeted banks’ participation in the Net-Zero Banking Alliance, an industry-led, United Nations-backed body dedicated to establishing net-zero lending and investment portfolios by 2050.