House fails to overturn veto of ESG legislation

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

House fails to overturn veto of ESG legislation

The House of Representatives on March 23 failed in its attempt to overturn President Joe Biden’s (D) veto of the Congressional Review Act (CRA) resolution Congress had sent to his desk that sought to block a Labor Department rule permitting ESG considerations in retirement plans.

The U.S. House failed Thursday to override President Joe Biden’s first veto—of a Republican-led bill that would have banned the consideration of environmental, social or governance issues in retirement and other investment decisions.

Republicans failed to mount the necessary two-thirds votes needed in the House to override the president’s veto of the “ESG” investment bill. The override failed on a 219-200 vote mostly along party lines as most Democrats opposed.

The standoff was a first test of the strength of the new Republican majority in the House as it confronts the Democratic president in the White House.

House Republicans had succeeded in passing the legislation through Congress last month, part of their agenda to undo so-called “woke” government policies that strive to bring new ways of thinking about social and environmental issues with equity and accountability.

The legislation was a pushback against the idea of “ESG” investing, which takes into account a company’s environmental social and governance record, including on issues like climate change….

Using special procedures, the House and Senate approved the rollback with a simple majority in both chambers, but there was not enough support in Congress to mount the veto override.

In the states

Florida continues its pushback against ESG

The Florida State Legislature on March 24 took the first step toward passing a law banning the use of ESG in all state and local investments. The Florida House passed the bill 80-31. It will now move on to the state Senate for consideration. 

In a priority of Speaker Paul Renner, R-Palm Coast, the Florida House on Friday passed a measure that would prevent consideration of “environmental, social and governance” standards in investing government money.

The Republican-controlled House voted 80-31 to approve the bill (HB 3) targeting what is known as “ESG.”

Rep. Kimberly Daniels, D-Jacksonville, crossed party lines to join Republicans in supporting the bill. Gov. Ron DeSantis and members of the state Cabinet last year directed investment decisions in the Florida Retirement System Defined Benefit Plan to prioritize the highest returns without consideration of environmental, social and governance standards.

The bill, which will go to the Senate, would expand that to all funds invested by state and local governments. The bill would require that state and local-government investment decisions be made “solely on pecuniary factors” and would prevent “sacrificing investment return or undertaking additional investment risk to promote any non-pecuniary factor.”

It would prevent government fund managers from considering issues such as climate change and social diversity when deciding how to invest money.

Kansas passes legislation opposing ESG

The Kansas House also passed a bill on March 23 that would prohibit the use of ESG factors in state and local pension contracting and investments. Supporters and opponents alike questioned whether the bill would have much impact.

Bipartisan frustration flourished during Kansas House debate on a bill requiring state and local governments to ignore environmental and social factors and focus exclusively on achieving the greatest financial return when making contract decisions and pension investments.

Legislation approved Thursday by the House on a vote of 85-38 and forwarded to the Kansas Senate would amend state law to force the Kansas Public Employees Retirement System to concentrate on the fiduciary duty of maximizing monetary gain with a portfolio serving teachers and other government workers. The bill also would forbid the state, as well as cities, counties and school boards, from giving weight to environmental, social or governance criteria, or ESG, when signing contracts.

“We’re seeing governments weaponize and use pension systems and government contracts to further their ideological agendas,” said Rep. Nick Hoheisel, a Wichita Republican. “Most folks in this chamber, at least on my side, believe we should invest public funds with the best return on investment possible.”…

House Bill 2436 would make it illegal to give preference or to discriminate against specific businesses, including those engaged in nuclear, oil, coal or natural gas operations, agriculture production, forestry, mining, and firearm and ammunition manufacturing.

The legislation in the House would block contracting and investing tied to ESG goals such as diversity by race, ethnicity, sex or sexual orientation. It also specified investments and contracts couldn’t be guided by analysis of whether companies assisted employees in obtaining an abortion or with gender assignment surgery….

The House stopped on procedural grounds an attempt by Rep. Michael Murphy, R-Sylvia, to tack on an amendment requiring Kansas investment advisers to secure written permission from clients before initiating investments aligned with ESG principles.

Murphy said the United Nations had worked for decades to infiltrate the economy with ideas of gender parity, racial justice and poverty reduction. The House bill would offer a measure of protection to key Kansas businesses from dangerous activists who didn’t put profit first, he said….

Rep. Sean Tarwater, R-Stilwell, and Rep. Rui Xu, D-Westood, agreed the bill wouldn’t do much to transform investment activity in Kansas. Tarwater had sought a deeper dive into the ESG problem and referred to the House bill, if signed into law, as “one of the weakest” in the United States.

“I wish we could have done better,” Tarwater said. “Sometimes we try to appease everybody, but we just can’t. It’s a narrow road. You’ve got constituents and businesses on one side. You’ve got your supporters on another. It’s hard to keep everybody happy.”

On Wall Street and in the private sector

Hundreds of investment funds to lose their MSCI ESG ratings

Hundreds of ESG funds are expected to be stripped of their ESG ratings and thousands of others will have their ratings downgraded following the expected release of an MSCI report on the topic, according to The Financial Times (and its sources, including BlackRock itself).

Hundreds of funds are about to be stripped of their environmental, social and governance ratings and thousands more will be downgraded in a shake-up being pushed through by index provider MSCI.

The impact could be particularly acute in Europe where a growing number of institutions will only invest in funds that are deemed to be compliant with ESG-investing principles. In 2022, ESG exchange traded funds accounted for 65 per cent of inflows into European ETFs, according to Morningstar.

MSCI, which has $13.5tn of assets benchmarked against its indices, is yet to publish the results of a consultation on its ESG ratings. But according to a client note from BlackRock’s iShares arm, the world’s largest ETF provider, seen by the FT, the number of European ETFs with a triple-A ESG rating from MSCI is set to tumble from 1,120 to just 54, while the number with no rating will surge from 24 to 462.

The changes are part of a push by index providers to tighten up the criteria for what qualifies as an ESG-compliant fund amid pressure from regulators concerned about the prevalence of so-called “greenwashing” as the sustainable finance industry expands rapidly. The sharp reduction in funds with top ratings could mean that ESG-focused investors have fewer places to put their cash, potentially driving up the price of assets with a sustainable label.

Under MSCI’s changes, all “synthetic” ETFs that use swaps to track the value of assets will lose their ESG rating — even if funds that own the identical underlying assets are rated highly.

In addition, most “physical” funds, which directly hold portfolios of equities or bonds, are likely to have their rating lowered.

The changes, due to take effect by the end of April, will apply to all ETFs and mutual funds globally.

Financial firms change ESG messaging approach

Some banks and financial services firms are changing their messaging around ESG in response to pressure from both sides of the political spectrum. Financial service providers are reducing their ESG emphasis in red state messaging and stressing the ESG aspects of their investment products and policies in blue states, according to a Bloomberg report:

Banks and financial firms are quietly recalibrating how they talk about ESG investing in the US, navigating around potential political fights in order to avoid losing lucrative business.

Eleven major banks and money managers told Bloomberg News that they’re adjusting the language they use in pitch books, marketing materials and investor reports when seeking to sell funds and take part in financial deals. In some cases this means avoiding using the ESG acronym and related terms in Republican-led states, while for blue states, they’re playing up their ESG credentials, according to representatives of the financial firms who asked not to be named discussing private information.

The different language doesn’t reflect a change in underlying services, just an acknowledgment that words need to be adjusted depending on who the client is, the people said. In general, they spoke of a desire to tweak language to refer to the long-term cost of things like flood risk, land erosion and extreme weather, rather than using potentially divisive terms like climate change….

Arthur Krebbers, who runs ESG capital markets for corporates at Edinburgh-based NatWest Group Plc, said fund managers he speaks to are becoming “coy” about referring to their climate goals to US clients. There are “regional nuances” in the choice of words, “particularly in the US,” he said.