North Carolina becomes latest state to challenge 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

North Carolina becomes latest state to challenge ESG

The North Carolina State Senate on June 13 passed a bill banning the use of ESG in state investments. The bill previously passed the state House and now heads to the desk of Gov. Roy Cooper, a Democrat and ESG supporter. Cooper is expected to veto the bill, but the legislature is expected to have the votes to overturn a veto:

The North Carolina Senate voted Tuesday to ban the consideration of environmental, social and governance (ESG) scores in state hiring and investment decisions.

The bill passed the Senate along party lines with a 29-18 vote and was sent to the desk of Democratic Gov. Roy Cooper, a supporter of ESG. The North Carolina House approved the legislation in a 76-41 vote last week. 

The vote totals in both chambers suggest a veto from Cooper could be overridden. 

State treasurer Dale Folwell, who manages one of the largest state pension funds in the U.S., said he supports the legislation because “people want their government to work.” 

“This bill is the perfect example of how elected leaders can get together and make good policy so that future treasurers will not be able to use beneficiaries’ money to promote a political agenda,” said Folwell, a Republican gubernatorial candidate who has criticized ESG policies as “wacktivism.” 

The bill does not ban private companies from considering ESG factors, like how a corporation interacts with the environment, a company’s relationship with its stakeholders and community, and the ethics of a company’s leadership. …

In April, North Carolina Republicans tried to pass a more sweeping bill which would have banned all banks in North Carolina from accounting for ESG factors, but the legislation faced pushback from the N.C. Chamber of Commerce.

Alabama governor signs legislation opposing ESG in state contracts

Alabama Governor Kay Ivey (R) signed legislation on June 6 banning state contracts with companies that engage in ESG-related boycotts:

Gov. Kay Ivey signed SB261 by Sen. Dan Roberts, R-Mountain Brook, into law Tuesday and emphatically supported the law, which is one of the broadest anti-ESG bills in the country.

“No matter how much Corporate America and the national media want to push their social issue of the day on folks, the state of Alabama will continue protecting both our values and our businesses,” Ivey said. “Alabama citizens, in no way, shape or form, want ESG influencing business in our state, and this legislation most certainly sends that message. Alabama – where businesses do business and government serves her people! We call it common sense.”…

The legislation sets out particular sectors that cannot be “economically boycotted” by other companies who hope to contract with the state.

The sectors include fossil fuels, timber, mining, agriculture and firearms and ammunition manufacturers.

It also precludes companies from boycotting companies who are not committed to meet environmental standards, particularly regulations to offset, reduce or eliminate greenhouse gas emissions. Or companies that don’t meet certain composition, compensation, or disclosure criteria. Or companies that don’t facilitate access to abortion, sex or gender change surgery, medications, treatment or therapy.

“We’re trying to ensure that Alabama’s tax dollars will not be used to subsidize private entities that boycott law-abiding businesses for reasons relating to arbitrary or subjective standards,” Roberts said. “I think we’re starting to see it on a national front … We’re trying to stop is a movement that’s going on in the United States that’s commonly referred to with environmental social governance.”

Texas Legislature passes bill prohibiting insurers from considering ESG factors

The Texas Legislature passed a bill last month prohibiting insurance companies from setting rate policies using ESG factors. The bill, which still needs the signature of Gov. Greg Abbott (R) to become law, is part of the state’s ongoing opposition to ESG policies throughout various industries:

Insurers in Texas can no longer account for environmental, social or governance criteria when setting rates for almost all forms of insurance under a bill passed by the Legislature last month.

While the measure, Senate Bill 833, has no penalties and still allows companies to consider factors that are “relevant and related to the risk being insured” — even if those risks include ESG factors — insurers who testified about the bill called it an overreach, with potential negative consequences to the state’s and the nation’s insurance market.

The bill is part of a broader, national push by the Republican Party to limit the effectiveness of ESG measures. After Texas passed an anti-ESG investing bill in 2021, four other states followed suit, with more considering putting similar laws on the books.

When introducing the bill in a March House hearing, state Rep. Tom Oliverson, R-Cypress, the chair of the House Insurance Committee, said he expected that in the near future, some states would mandate ESG policies while others would prohibit them.

“That’s something that insurers will have to adapt to,” Oliverson said. “The state of Texas is taking a position on this, and it is, we are not in favor of it. And furthermore you won’t be doing this if you are doing business in the state of Texas.”

The bill, which still needs Gov. Greg Abbott’s consent to become law, was introduced in response to groups including the Sunrise Movement, a youth-led climate organization that advocates for divestment from fossil fuel investments, according to bill analyses. In a letter to the White House, Abbott also touted the bill as part of an effort to curtail the Biden administration’s “war on the American energy sector.” …

Several organizations representing the insurance industry opposed the bill in hearings in March, saying that the bill proposed a broad definition of ESG that would be hard to apply, and that it would interfere with the ability to accurately calculate risks and create insurance coverage policies. The bill applies to almost all forms of insurance, including property, health and life insurance. The only types of insurance not covered by the measure are crop insurance and fidelity, surety and guaranty bonds.

In a statement, the Texas Department of Insurance said that the agency is “currently reviewing all enacted legislation related to TDI and preparing for implementation,” but offered no further details on how it would enforce the new law, which will apply to all policies beginning Jan.1 unless Abbott vetoes it.

Conservatives celebrate state government ESG pushback

Over the past week or so, commentators have taken to the pages of conservative media to celebrate state efforts to push back against ESG. First up was Andy Puzder, the former CEO of CKE Restaurants, who praised the states in The Wall Street Journal:

States have seized the initiative in resisting environmental, social and governance investing. These legislative efforts have been so successful that the Harvard Law School Forum on Corporate Governance recently published an article titled “It’s Time to Call a Truce in the Red State/Blue State ESG Culture War.” ESG advocates are understandably concerned that what looked like a juggernaut is suddenly facing stiff opposition. But that’s no reason to slow the effort. ESG either protects the retirement assets of hard working Americans or, as states are increasingly concluding, it doesn’t.

Last year the American Legislative Exchange Council and the Heritage Foundation jointly proposed model legislation to stem the rise in ESG investing. Their proposal has served as the basis for states to require that asset managers focus exclusively on maximizing returns. These 10 states combined—Arkansas, Florida, Kansas, Kentucky, Indiana, Montana, North Dakota, Tennessee, Utah and West Virginia—hold more than $500 billion in pension fund assets.

The bills have varied in language. Eight states have explicitly named ESG when outlining their new investing restrictions. Florida, Indiana and Kansas also prohibit investing to advance “social, political, or ideological interests.” Montana and West Virginia add the phrase “or other similarly oriented considerations” to their ESG restrictions.

All are clear and consistent in their intention: Those responsible for investing and shareholder voting must act solely in the financial interests of the pension fund’s beneficiaries. ESG and other forms of politically motivated investing are inconsistent with that duty….

With the momentum now seized by conservative lawmakers, there may be an opportunity to bring some common sense back to blue states. One unfavorable court decision could subject ESG-advocating trustees and investment managers to very substantial class-action lawsuits. Pension funds are underwater anyway; suing Wall Street could be seen as a good way to try to get healthy. For now, the ESG jig is up in 10 states and counting.

Catherine Gunsalus, the director of state advocacy for Heritage Action, made much the same case in The Washington Examiner:

Gov. Ron DeSantis (R-FL) recently made headlines when he signed Florida’s anti-ESG (environmental, social, and corporate governance) legislation into law. But Florida was not the first state to protect taxpayer dollars from woke investing, and it won’t be the last.

Despite what liberal outlets such as the Washington Post would have you believe, the conservative battle against woke investing is a winning fight. Over the last two years, the number of states that introduced anti-ESG legislation doubled, and the number of states that have passed those bills has nearly tripled to 11 states so far this year….

Simply put, hard-working people want to see their jobs, pensions, and retirement savings protected from funding a political agenda that will hurt them. For example, Oklahoma taxpayers don’t want to fund a net-zero political agenda aimed at phasing out natural gas when 6% of Oklahoma jobs are tied to the oil and gas industry. …

Another way states are combating the Left’s ESG push is by prohibiting asset managers from using ESG standards when investing state funds. Florida, Kansas, and several other states have passed legislation of this kind this year to protect state investments and pension funds from ESG. This approach is known as the state pension fiduciary model, and this model, or a version of it, was introduced in more than a dozen states and has already been enacted in 10 states in 2023. These laws ensure asset managers make investment decisions based solely on financial factors, not political ones — something they should already be doing. Asset managers making decisions or commitments based on ESG factors risk violating their fiduciary duty to the state.

To underscore the momentum of the anti-ESG movement in states across the nation, Kansas’s fiduciary model — one of the strongest in the nation — became law despite having a Democratic governor. Kentucky and Arkansas also enacted strong fiduciary model bills. Montana, Tennessee, and Arizona have passed similar bills, and several more states could see legislation passed this year.

In the spotlight

Shareholder season indicates Vanguard distancing from ESG

This past January, Stephen Soukup, a market analyst and the author of the book The Dictatorship of Woke Capital, predicted that Vanguard—the second biggest of “The Big Three” passive asset management firms—would be less likely to support ESG efforts than the other two managers, BlackRock and State Street. Soukup argued that Vanguard’s business model, which caters to retail investors over institutional investors, would force the company to tread more delicately that its competitors:

Retail investors think about the bottom line.  Today.  Tomorrow.  When they turn 65.  To them, their investments translate into college education for the kids, vacations, a comfortable retirement, not having to eat cat food when they’re 80, etc.  Institutional investors don’t have the same personal and emotional connection to their investments.  They’re Tom Hagan or Michael Corleone to retail investors’ Santino.  It’s strictly business.

According to Barron’s (and Morningstar), the evidence from this past shareholder season may support Soukup’s case and the idea that Vanguard is distancing itself from the ESG movement:

The Big Three asset managers—BlackRock, State Street, and Vanguard—are often lumped together. But a recent report finds they make very different decisions when it comes to voting on environment, social, and governance issues, and that Vanguard’s ESG support is half that of its two rivals.

BlackRock (ticker: BLK) and State Street (STT) each backed a slight majority of 100 “key” shareholder resolutions—those that addressed environmental or social themes and were supported by at least 40% of a company’s independent shareholders, according to an analysis from Morningstar.

Vanguard supported 28%, consistent with the firm’s record of low backing for social and environmental shareholder resolutions, said Morningstar. BlackRock and State Street supported 55%, and 60% of the key resolutions, respectively.

“Investors who prefer to invest with a manager that supports a majority of key ESG resolutions would be more comfortable with BlackRock’s and State Street’s voting decisions than Vanguard’s,” said Lindsey Stewart, director of investment stewardship research and author of the report, in a blog post. …

This isn’t the first time Vanguard has come under fire over ESG. In December, the company was criticized after it withdrew from the widely supported Net Zero Asset Managers initiative to cut emissions.

Vanguard said it had decided to pull out “so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors.”