Florida governor signs bill opposing ESG

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 the states

Florida governor signs bill opposing ESG

Florida Gov. Ron DeSantis (R) signed legislation on May 2 prohibiting the use of ESG criteria in the investment of public funds. According to Reuters:

The bill is one of the furthest-reaching efforts yet by U.S. Republicans against sustainable investing efforts, and a clear political message from DeSantis, a likely presidential candidate.

Republicans, including some from energy-producing states, say many executives and investors have lost their focus on returns as they take growing account of issues like climate change and workforce diversity.

“We want them to act as fiduciaries. We do not want them engaged on these ideological joyrides,” said DeSantis just before he signed the bill at a webcast event.

Analysts said the legislation goes further than other state anti-ESG bills, even as business groups worry the efforts pose financial risks….

The law also outlaws the sale of ESG bonds, a popular way to fund renewable energy projects or lower debt costs for borrowers if they meet gender diversity or greenhouse gas emissions targets.

Oklahoma treasurer announces 13 financial institutions can’t do business with the state over ESG policies

Oklahoma State Treasurer Todd Russ (R) on May 3 issued a list of 13 financial institutions that are ineligible to do business with the state under a 2022 law because, according to Russ’s office, they engage in energy boycotts that hurt the state’s economy. The listed institutions cannot manage state pension funds or enter into certain other contracts with public entities:

Oklahoma State Treasurer Todd Russ is planning to announce the sweeping measure Wednesday morning which represents one of the most aggressive actions any state has taken against banks pursuing so called environmental, social and governance (ESG) initiatives. The move ultimately blocks the banks from managing billions of dollars in Oklahoma pensions, investments and other state entities.

“The energy sector is crucial to Oklahoma’s economy, providing jobs for our residents and helping drive economic growth,” Russ said in a statement. “It is essential for us to work with financial institutions that are focused on free-market principles and not beholden to social goals that override their fiduciary duties.”

The ban impacts some of the largest asset managers and banks in the country including BlackRock, Wells Fargo, JPMorgan Chase, Bank of America and State Street. BlackRock alone reported in April that it has a staggering $9.1 trillion in assets under management.

Oklahoma’s actions come three months after Russ sent a letter and questionnaire to dozens of banks and financial institutions on Feb. 1, asking about their climate and energy investment policies. Russ noted at the time that BlackRock manages more than 60% of the Oklahoma Public Employees Retirement System.

Under a 2022 law passed by the state’s legislature last year, the state’s treasurer is mandated to probe the investment policies of banks it does business with and assemble a list of companies determined to be engaged in a boycott of the energy sector. Russ’ office said it received almost 160 responses which helped inform the decision Wednesday….

Overall, as of 2022, Oklahoma’s oil and gas industry and its component sectors sustained 4,000 businesses, produced $19 billion in state gross domestic product, provided state households with $16.5 billion in earnings and created 85,050 jobs, according to state data. The state is the nation’s sixth-largest crude oil producer and fifth-largest producer of marketed natural gas.

ESG standards pursued by major financial institutions, though, prioritize environmental investments, boosting green energy projects once deemed risky, over traditional oil and gas investments as well as corporate social priorities such as boardroom diversity initiatives.

Alabama regional banks push back against bill opposing ESG

A bill in the Alabama Senate aimed at opposing ESG in state investments has stalled. According to 1819 News, several regional banks that support ESG are lobbying legislators to oppose the bill:

Just as State Sen. Dan Roberts’ (R-Mountain Brook) anti-ESG (environmental, social and governance) bill was gaining momentum in the Alabama Legislature, its hearing before the Senate Fiscal Responsibility and Economic Development Committee, chaired by State Sen. Garlan Gudger (R-Cullman), was delayed until at least next week.

Sources familiar with the issue told 1819 News on Wednesday that Birmingham-based Regions Financial and the company’s lobbyist, senior vice president and head of state government affairs and economic development Jason Isbell, were behind the pushback against the bill that would prohibit government entities from contracting with companies that use ESG criteria to discriminate in business practices and leverage economic power for political and ideological objectives….

Over the past few years, Regions has defended the ESG agenda used by large asset management companies like BlackRock Inc. and other banks to push social and ideological agendas.

According to its website, Regions believes ESG contributes to its success….

In Regions’ 2022 Proxy Statement and Notice, Chair of the bank’s Board of Directors Charles D. McCrary touted its ESG report and adherence to standards set by the controversial World Economic Forum….

According to the Claremont Institute, Regions has promised $14,600,000 to BLM and related causes….

Regions is not the only entity within Alabama’s business elite pushing back against the anti-ESG legislation. According to an email from the Business Council of Alabama’s manager of Governmental Affairs William Newman to the council’s Tax and Fiscal Policy Committee, the BCA also opposed the Senate bill.

On Wall Street and in the private sector

Insurers re-evaluate ESG standards

Insurers are re-evaluating their affiliations with international climate change organizations and their acceptance of ESG standards, citing legal threats from governments. While the governments in question have not been named specifically, some observers think state opposition to ESG could be contributing to the re-calculation:

Insurers are being forced to rethink their approach to climate change as they assess the risk of being sued for antitrust violations.

Munich Re, the world’s biggest reinsurer, recently backed out of the Net Zero Insurance Alliance citing what it called the “material” legal risks it would face if it remained. The defection was followed by two more high-profile departures, with Zurich Insurance Group AG and Hannover Re also leaving. All three said they’ll still pursue net zero goals, just not in coordination with an alliance.

There are now concerns that more exits may follow. A spokesman for Scor SE said the firm’s NZIA membership is currently “being reviewed by the group’s executive committee and board.” Spokespeople for Allianz SE and Swiss Re AG both said the companies are “monitoring” developments.

Though Munich Re was unique in its explicit reference to legal risks, NZIA’s sudden loss of three key members has left the insurance industry looking like a casualty of the anti-ESG movement in the US. Insurers’ extra sensitivity about antitrust issues may be tied to the sector’s “occupational habit” of trying to anticipate risks, said Maurits Dolmans, a partner at Cleary Gottlieb Steen & Hamilton LLP who advises Race to Zero, a group that’s affiliated with NZIA and other climate alliances.

Alec Burnside, a partner at Dechert LLP in Brussels who specializes in competition law, says the firms most susceptible to the threat of litigation are those with large US operations….

“Companies that are exiting climate alliances have a practical interest in not getting into an ESG-wokeism slanging match with antitrust as one of the weapons that’s used against them,” Burnside said. “One way to keep your head down amid all the backlash against ESG is to say ‘we remain wedded to sustainability goals, but we are pursuing them unilaterally.’”

ESG shareholder proposals fail to gain support

The Financial Times reported on May 6 that shareholder resolutions supporting ESG (like proposals aimed at ending bank financing of fossil fuel projects) are failing to gain support this shareholder meeting season:

This year, shareholder resolutions at Citi and BofA demanding the banks stop financing new fossil fuel projects won less support than they did in 2022.

The shift echoes a broader trend in other types of climate-related votes. Across corporate America, there are signs of scepticism over so-called Say on Climate votes asking shareholders to approve climate transition strategies, says Glass Lewis, a shareholder advisory firm. It says while shareholders of US companies were among the first to propose a Say on Climate vote in 2021, none of these proposals were approved, with support ranging from 7 per cent to 39 per cent.

“That scepticism appears to have turned to indifference, as there were no shareholder proposals on this topic at US companies in 2022,” it said in a report in March. “It is likely that the momentum around this issue has essentially ceased for the time being at North American companies.”

At this point in the annual meetings season, it is too soon to know whether support for other types of climate shareholder proposals has been sapped this year. But two years after the tiny hedge fund Engine No. 1 shocked the world with a victory to elect directors to the board of ExxonMobil, the early voting results suggest climate advocacy by shareholders is not the force it was in 2021.

At the same time, investors have cooled on dedicated funds that invest with environmental, social and governance mandates. In April, Goldman Sachs was warned that one of its ESG equity funds might be delisted because it had not attracted enough investors. And more generally investors have pulled billions from sustainable funds this year.

This is partly because of performance. For a decade, US ESG large-cap equity funds were among the best performers in the stock market. But this year, ESG funds globally have underperformed the market as “ESG darlings” in clean energy have suffered amid a flight to safety, AllianceBernstein said in a May 3 report.

In the spotlight

Warren Buffett remains dubious of ESG

In a guest op-ed in The New York Times, Roger Lowenstein, a financial journalist and biographer of Warren Buffett, explained why the famed investor has rejected and continues to reject the ideas of ESG:

[A]s the Berkshire faithful gather for their annual meeting in Omaha on Saturday, Mr. Buffett is decidedly out of step with the progressive orthodoxy in corporate boardrooms. To Mr. Buffett, boards’ rightful role is, as ever, to serve the shareholders who have risked their capital. Institutional investors such as BlackRock’s Larry Fink have pushed E.S.G. — or environmental, social and governance — investing to turn corporations into agents of progressive change.

Scores of corporations have in the last few years adopted climate and diversity policies. The Business Roundtable, a chief executives group, proclaimed it no longer believed that corporations exist principally to serve shareholders. This is a little like the Communist Party dropping its primary allegiance to workers.

Mr. Buffett is having none of it. He is socially conscious and over the years has expressed concerns on topics as varied as inflation and nuclear proliferation. But he is dismissive of social governance warriors seeking to hijack the corporate mission. Most such critics represent institutions. Mr. Fink, mutual fund groups like Vanguard and state pension funds manage other people’s money — they advocate their opinions, not their purses. Mr. Buffett feels a greater allegiance to shareholders who purchased stock as he did — with their own cash.

Not surprisingly, Mr. Buffett has become a target for progressive institutional investors. At last year’s annual meeting, shareholders solicited proxy votes to force Berkshire to adopt four new policies, mostly on climate and diversity. They lost handily. (A resolution calling for Mr. Buffett to step down as board chairman, though not as C.E.O., fared the worst.) This year, Mr. Buffett faces six proxy challenges related to climate, diversity and corporate governance….

How did Wall Street’s wealthiest liberal come to be a refusenik? The simple answer is that Mr. Buffett hasn’t changed even as the political climate has….

If form holds, at Saturday’s meeting Mr. Buffett — and his sidekick, the curmudgeonly vice chairman Charlie Munger — will get plenty of questions related to corporate governance and even politics. Neither is likely to change his mind, and most shareholders seem to like it that way. Last year, assuming the dissident votes came from institutions, individual holders overwhelmingly backed management. Mr. Buffett may not conform to the fashionable standards of the Business Roundtable, but he is still in good graces with one group — individuals who trust him to manage their savings.