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.

Congressman introduces legislation that would eliminate ESG in TSP pensions

Congressman Chip Roy (R-Texas) on May 23 reintroduced legislation calling for the elimination of the use of ESG in the Thrift Savings Plan (TSP), the pension plan for federal employees and members of the military. The private managers of the TSP are BlackRock and State Street, two of the largest passive asset managers and among the biggest advocates of ESG.

On Tuesday, Representative Chip Roy (R-TX) led 17 of his Republican colleagues in re-introducing the “No ESG at TSP Act,” legislation that seeks to prevent the federal Thrift Savings Plan (TSP) from allowing taxpayer dollars to flow into Environmental, Social, and Governance (ESG) funds.

In a press release announcing the bill’s reintroduction, Roy said “ESG investing poses a dangerous threat to the free flow of capital,” and that the movement is actively threatening domestic energy supply, empowering activist shareholders, and advancing woke gender and racial ideologies.

“ESG is an investing scheme woke corporations are using to appease the Left by destroying reliable American energy and advancing radical gender and racial ideologies,” Roy said. “Last year, the Thrift Savings Plan began allowing federal employees to invest their taxpayer funded salaries into ESG plans. The U.S. Government has no business propping up woke scams like ESG. Congress should eradicate every federal policy and office that promotes it, starting here.”

The “No ESG at TSP Act” would prohibit TSP from allowing federal employees to invest their taxpayer-funded salaries into funds that make “biased investment decisions” based on ESG criteria, according to the release.

TSP currently manages about $817 billion in total assets, making it the largest defined contribution plan in the world. The vast majority of TSP contributions stem from withholdings from federal or servicemember paychecks and their respective agency matches. That means TSP is effectively allowing billions of taxpayer dollars to be used for ESG investing, the press release said, and the “No ESG at TSP Act” would stop this….

The new bill’s cosponsors include Dan Bishop (R-NC), Troy E. Nehls (R-TX), Brian Babinn (R-TX), Byron Donalds (R-FL), Dan Crenshaw (R-TX), Scott Perry (R-PA), Bob Good (R-VA), Michael Cloud (R-TX), Buddy Carter (R-GA), Andy Ogles (R-TN), Matt Rosendale (R-MT), Randy Weber (R-TX), Andy Biggs (R-AZ), Keith Self (R-TX), Glenn Grothman (R-WI), Lauren Boebert (R-CO), and Josh Brecheen (R-OK).

In the states

Net-Zero Insurance Alliance suffers membership losses following state pressure

The Net-Zero Insurance Alliance, a global organization comprised of insurance companies that have agreed to promote ESG climate policies, continues to lose members after 23 state attorneys general sent letters earlier this month warning insurance companies that participation in the alliance potentially constitutes illegal collusive behavior under antitrust laws:

A United Nations-convened climate alliance for insurers suffered at least three more departures on Thursday including the group’s chair, as insurance companies take fright in the face of opposition from U.S. Republican politicians.

At least seven members of the Net-Zero Insurance Alliance (NZIA), which launched in 2021, have now left including five of the eight founding signatories.

Departures on Thursday included AXA , whose Group Chief Risk Officer Renaud Guidée had chaired the alliance. The French insurer said in a statement it was leaving to “continue its individual sustainability journey.” Germany’s Allianz (ALVG.DE) and French reinsurer SCOR (SCOR.PA) also quit.

NZIA, part of the Glasgow Financial Alliance for Net Zero set up by U.N. climate envoy Mark Carney, requires members to commit to reducing their greenhouse gas emissions.

The group has been buffeted by growing political opposition from some Republicans in the United States, who say the group could be violating antitrust laws by working together to reduce clients’ carbon emissions.

This month 23 U.S. state attorneys general told NZIA members that the group’s targets and requirements appeared to violate both federal and state antitrust laws.

They gave insurers a month to respond in a May 15 letter – the latest salvo from the Republicans against financial institutions factoring environmental, social and governance-related (ESG) factors into their decision making.

Harvard essay argues for end to state ESG support and opposition

Harvard Law School Forum on Corporate Governance published an essay on May 29 written by Eli Lehrer (the founder the R Street Institute) and Robert Eccles (a visiting professor of finance at Oxford), arguing for a truce on state ESG policy. They argued policies promoting and opposing ESG were both costly and counterproductive:

Over the past year, the debate over Environmental, Social and Governance (ESG) standards in the United States has revealed stark policy contrasts between red and blue states. Red state officials have proposed and enacted “anti-boycott” bills which bar state business with firms that divest from favored industries. Blue states, on the other hand, have widely considered efforts to mandate divestments from the same industries. Neither approach makes economic sense. Recognizing this creates a real opportunity for a truce, based on fiduciary duty and the separation of political issues from investment decisions.

And we need a truce because the pace of legislation about ESG is only accelerating. Data collected by the law firm Simpson Thacher & Bartlett shows that at least 28 policies and laws have taken effect since 2021 alone and, as of the spring of 2023, there are at least 13 pending bills related to ESG. This doesn’t count the enormous number of existing policies–everything from preferences for small businesses to laws against investing state funds with companies that operate in certain countries–that would fall under the ESG umbrella if proposed today. While the stated financial protection and future-proofing objectives behind these proposals are worth consideration, they are bad policies likely to fail on their own terms while doing significant fiscal damage.

Let’s start with the red-state boycott ban bills which are typically directed at investment firms that limit firearms or fossil fuel investments. These bans represent an unwise ceding of legislative power that will cost states billions….

While anti-boycott bills are too new for anyone to have long-term evidence of their impacts,  there is little question that their mirror image–mandatory divestment policies–have negative fiscal consequences and fail to produce their desired outcomes. As such, a Maine law that requires the state pension funds to end fossil fuel investments–typical of proposals floating around in several blue states–seems almost certain to have roughly the same impact as past divestment policies targeting narrower classes of firms. Analysis conducted by California’s giant CalPERS and CalSTRS pension funds both show billions in dollars of losses resulting from that states’ existing divestment policies. Even worse for supporters of divestment efforts, the best evidence seems to indicate that they are actually counterproductive….

But even though most  pro- and anti-state level ESG policies don’t work as advertised, it’s unwise to dismiss the rationale behind them out of hand. State employees–who, ideally, will represent the full spectrum of a state’s views–shouldn’t have their pension funds invested in ways that place what may be political views above return on investments….

On the other hand, any number of ESG-related considerations can have strong connections to investment return….

This brings us to a proposed solution that both the  left and right should be able to agree upon: clear fiduciary duty laws that define who is responsible for state investment, allow them to consider ESG factors only when they contribute to economic value creation and assure that state employees in defined contribution plans can select non-ESG options.

Alabama AG criticizes ESG supporters who claim to promote free markets

Alabama Attorney General Steve Marshall (R) took to the pages of The Wall Street Journal on May 23 to condemn congressional ESG supporters for calling themselves free market advocates:

Proponents of ESG—environmental, social and governance—investing are posing as champions of the free market. Utah Attorney General Sean Reyes and I testified earlier this month before the House Oversight Committee regarding our continuing investigations into several global financial alliances that aim to impose ESG policies on American businesses and consumers in defiance of our free-market economy.

Minutes into the hearing, Rep. Jamie Raskin (D., Md.) claimed that my colleagues and I were “assaulting the free market” and attempting to “stop the market from responding to the climate crisis.” Rep. Katie Porter (D., Calif.) continued the gaslighting, noting that “capitalism delivers freedom,” which “happens when markets let people choose what they want.”

As Mr. Raskin and Ms. Porter surely know, the free market has resisted onerous ESG mandates. That’s why sectorwide financial alliances have emerged to restrict the market’s functioning and stymie consumer choice.

A company’s affinity for ESG ideology is its prerogative. Likewise, it is the consumer’s choice to reward a company’s social messages with continued business. Such corporate stances are often nothing more than virtue signaling. This can often be a costly decision, as Anheuser-Busch is learning in the wake of Bud Light’s partnership with transgender activist Dylan Mulvaney.

The more sinister ESG acolytes, however, aren’t merely printing woke messages on six-packs. America’s self-proclaimed “socially responsible” financial institutions, which should be competing in the free market, are instead joining forces with one another and their global counterparts to decide which companies—and, in some cases, which industries—should be permitted to continue their market participation unimpeded.

Since 2017, a growing number of these financial alliances, including Climate Action 100+, the Net-Zero Banking Alliance and the Venture Climate Alliance, have plotted to pressure blacklisted companies into making a priority of decarbonization and other social goals at the behest of the United Nations, not American consumers. In other words, by controlling trillions of dollars in assets, these groups intend to corner the market through potentially illegal horizontal agreements and force preferred social and political objectives on American companies and consumers.

The Net Zero Asset Managers initiative boasts 301 signatories and $59 trillion in assets under management. On its website, the group writes: “Our industry’s ability to drive the transition to net zero is extremely powerful. Without our industry on board, the goals set out in the Paris Agreement will be difficult to meet.”

This statement doesn’t refer to a company making a business choice because of consumer demand or shareholder interest. Rather, it reveals a coalition of major financial-industry players that have come together to choke out certain disfavored companies and industries by limiting their access to capital and then pointing to this manufactured obstruction as evidence that these firms are a bad investment. The resulting harm to the working public—of little interest to global elites—is higher energy costs and fewer options across a variety of markets, including automobiles, appliances and food production.

In the spotlight

Forbes contributor says Target and Bud Light may have had ESG motivations behind LGBTQ campaigns and partnerships

Forbes contributor Jon McGowan–an attorney with a background in ESG–suggested last week that Target’s LGBTQ Pride Month campaign, which has been a topic of conversation and disagreement, may have been influenced by ESG scoring metrics. He said the same about the Bud Light partnership with transgender influencer Dylan Mulvaney:      

Target is the latest corporation to face backlash for LGBTQ+ pride merchandise, in what is becoming known as “Bud Lighting.” With ESG becoming a divisive political issue, there is a natural tendency by some to blame everything inclusive on ESG. However, this is not without merit. Diversity and inclusion are key issues in ESG, and it is worth looking at corporate documents to see if there is a connection….

In the ESG debate, most focus on the environmental aspect. Measuring sustainability programs and environmentally friendly actions taken by a company. However, the social aspect is the major source of controversy for the right. Diversity, equity, and inclusion, or DEI, programs; policies which target specific industries; and policies tied to political stances are often factors in ESG. Companies may implement programs and internal policies to bolster their ESG Reports. Recently, the focus of controversy has been on outward facing LGBTQ+ polices supporting and promoting the transgender community.

Budweiser was one of the first to face serious backlash after releasing a limited run Bud Light can featuring transgender influencer Dylan Mulvaney. Conservatives were outraged, and the company faced a significant loss in business. There is reason to believe that Anheuser-Busch InBev, the parent company of Budweiser, took the action as part of a marketing campaign meant to bolster their ESG scores….

Looking at Target’s 2022 ESG Report, the company boasts a 100% score by the Corporate Equality Index put out by The Human Rights Campaign. CEI is 40% based on outward facing LQBTQ policies, and a company can face an additional 25% penalty for actions which do not support the LGBTQ cause. Their high score shows a very LGBTQ friendly company. Additionally, they were ranked #4 in DiversityInc’s 2022 Top Companies for LGBTQ Employees….

If Target was considering ESG in marketing decisions relating to LGBTQ+ merchandise, it was probably to maintain their already high scores. However, their choice to change course and remove some of the Pride merchandise will have the opposite effect.

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

States send letters and questionnaires inquiring about ESG at firms

Twenty-one state financial officers signed letters on May 15 that were sent to large asset management firms and two proxy advisory services (Glass-Lewis and Institutional Shareholder Services, who combined represent 95% of the proxy advisory business), requesting answers to questions about the use of ESG and the justification for doing so as legal fiduciaries of their clients’ money:

The letter expressed the state financial officers’ concern over the asset management and proxy advisory firms’ approach to how they are advising their clients to vote in shareholder proposals. Which in many cases appear to be unrelated to companies’ core business and have, in many cases, appeared to have been to advance the radical left-wing agenda — such as environment, social, and governance (ESG)….

[T]he letters included a questionnaire for the firms to answer and in turn, detail how they determine which shareholder proposals to support and how the firms analyze their proposal’s impact before deciding which one to go with.

Nebraska state Treasurer John Murante, a former national chair of the State Financial Officers Foundation (SFOF), told Breitbart News, “For too long, the ESG agenda has plowed forward at the behest of large investment managers like BlackRock.”

“Together, they’ve [the firms] steered votes on issues ancillary or even detrimental to companies’ core business,” Murante added. “With these letters, we hope to expose the scam that is crushing shareholder value, all in the name of an extreme, progressive agenda.”

The list of asset managers firms and proxy advisory firms who received the letter were: BlackRock, Vanguard Group, Fidelity Investments, UBS Group, State Street Global Advisors, Morgan Stanley, JP Morgan Chase, Credit Agricole, Allianz Group, Capital Group, Goldman Sachs, Bank of New York Mellon, Amundi, PIMCO, Legal & General, Edward Jones, Prudential Financial, Deutsche Bank, Bank of America, Invesco Ltd, Glass Lewis, and ISS.

The 21 state financial officers who signed the letter were Alaska Commissioner of Revenue Adam Crum, Arizona state Treasurer Kimberly Yee, Florida Chief Financial Officer Jimmy Patronis, Idaho state Treasurer Julie Ellsworth, Indiana state Treasurer Dan Elliot, Iowa state Treasurer Roby Smith, Kansas state Treasurer Steven Johnson, Louisiana state Treasurer John Schroder, Mississippi state Treasurer David McRae, Missouri state Auditor Scott Fitzpatrick, Missouri state Treasurer Vivek Malek, Nebraska state Treasurer John Murante, Nebraska Auditor Mike Foley, North Carolina state Treasurer Dale Folwell, North Dakota state Treasurer Thomas Beadle, Oklahoma Auditor and Inspector Cindy Byrd, Oklahoma state Treasurer Todd Russ, South Carolina state Treasurer Curtis M. Loftis, Jr., Utah state Treasurer Marlo Oaks, West Virginia state Treasurer Riley Moore, and Wyoming state Treasurer Curt Meier. Ohio state Treasurer Robert Sprague signed on to the proxy vote advisory firm letters.

States seek to block U.S. Department of Labor ESG rule

Twenty-five states asked a federal judge in Texas on May 16 to block the implementation of the Biden Labor Department’s rule on the use of ESG in retirement investment plans that fall under ERISA. The states argue that the Biden rule was not created properly because the previous rule (enacted under the Trump administration) was, in their view, improperly invalidated:

A group of Republican-led U.S. states has asked a federal judge in Texas to strike down a Biden administration rule allowing socially conscious investing by retirement plans, saying it will imperil Americans’ retirement savings.

Lawyers for the 25 states led by Utah and Texas said in a filing in Amarillo, Texas, federal court late Tuesday that the U.S. Department of Labor failed to justify its departure from a Trump-era rule that limited investing based on environmental, social and corporate governance (ESG) factors.

The rule, which took effect Jan. 30, sets guidelines for ESG investing including requiring that socially conscious investments are still financially sound.

The states sued in January and in February had asked the judge to temporarily block the rule pending the outcome of the case. The judge has not yet ruled on that bid, and in Tuesday’s filing, the states asked the judge to rule on the merits of their lawsuit….

The Labor Department has said the Trump-era rule, which was criticized by business groups and the financial industry, failed to account for the positive impact that ESG investing can have on long-term returns. Business groups said the Trump administration rule was unnecessary and confusing for investment managers.

The new rule covers plans that collectively invest $12 trillion on behalf of 150 million Americans.

Alabama Senate advances bill opposing ESG boycotts

The Alabama State Senate on May 18 passed a bill that would prohibit state contracts with businesses that boycott certain companies and industries (like fossil fuel or mining companies) based on ESG criteria. The bill now moves to the state House for consideration:

State senators passed a bill that would prohibit state contracts with businesses that boycott certain sectors of the economy based on environmental, social, and governance or ESGs. Sponsored by Senator Dan Roberts, R-Mountain Brook, Senate Bill 261 is among the strongest anti-ESG legislation in the nation to protect investors and funds in Alabama.

“I appreciate the support of my colleagues in the Senate for working to pass this legislation,” said Senator Dan Roberts. “The Alabama Senate has made it clear that we want businesses to focus on growing and expanding and not working to push any political agenda with left-wing ESG policies.”

The bill specifies company that refuses to deal with, terminates business activities with, or otherwise takes any commercial action that is intended to penalize, inflict economic harm on, limit commercial relations with, or change or limit the activities of a company because the company, without violating controlling law, does any of the following:

— Engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy, timber, mining, or agriculture.

— Engages in, facilitates, or supports the manufacture, import, distribution, marketing or advertising, sale, or lawful use of firearms, ammunition, or component parts and accessories of firearms or ammunition.

— Does not meet, is not expected to meet, or does not commit to meet environmental standards or disclosure criteria, in particular, to eliminate, reduce, offset, or disclose greenhouse gas emissions.

— Does not meet, is not expected to meet, or does not commit to meet corporate employment or board composition, compensation, or disclosure criteria.

— Does not facilitate, is not expected to facilitate, or does not commit to facilitating access to abortion or sex or gender change surgery, medications, treatment, or therapies….

The bill now goes to the House for more debate.

On Wall Street and in the private sector

ESG employment pays better

According to Reuters, U.S. finance professionals who have ESG in their job title earn about 20% more than their non-ESG colleagues on average, at least in terms of base salary. The discrepancy began about three years ago and has continued to grow:

U.S.-based bankers and money managers whose job titles include “ESG” or “sustainability” earn on average around 20% higher base salaries than colleagues of the same seniority without those labels, according to analysis of salary data shared with Reuters.

More than $30 trillion in capital has been committed to environmental, social and corporate governance-related investments as the world looks to curb greenhouse gas emissions and companies face pressure on issues such as workplace diversity and social justice.

This has sparked a scramble to find bankers and asset managers for these roles, leading to higher base salaries than for equivalent professionals in non-ESG related functions, the analysis conducted for Reuters by New York-based data startup Revelio Labs shows.

“Salaries of ESG and non-ESG personnel started to diverge in 2020, in line with the spike in hiring in ESG roles due to the increasing focus on ESG and sustainable investing in the finance sector,” said Loujaina Abdelwahed, an economist at the company.

The strong demand for professional talent comes amid a political backlash against ESG in parts of the Western world, especially in the United States, where it has culminated in various laws to remove environmental and social considerations from business in some states….

Since 2019, the rate of base salary growth for ESG roles has been about 38 percentage points higher than non-ESG personnel, Abdelwahed said.

ESG-tagged roles overtook non-ESG on a six-month moving average basis in June 2020 and in August 2021 surged to peak around $109,846, fully $20,000 higher than non-ESG.

In the spotlight

Majority of Americans not familiar with ESG 

Gallup released the results of its recent ESG polling on May 22, and the results indicated that the public remains largely unaware of the issue. The respondents who indicated an opinion on the issue were split with 22% viewing ESG favorably and 19% viewing ESG negatively:

Efforts to promote adoption of the environmental, social and governance framework in investing, commonly termed ESG, have gained traction in recent years and have become the subject of pro- and anti-ESG legislation, yet the general public is no more familiar with ESG today than two years ago.

Thirty-seven percent of Americans currently report being “very” or “somewhat familiar” with ESG, unchanged from 36% in 2021. Another 22% today are “not too familiar,” while 40% are “not familiar at all.”

Underscoring the public’s lack of familiarity with ESG, nearly six in 10 Americans (59%) take the “no opinion” option when asked if they view “the movement to promote the use of environmental, social and governance, or ESG, factors in business and investing” as a positive or negative development. The remaining four in 10 are about evenly divided between expressing a positive (22%) and negative (19%) view of the practice.

While adults who are familiar with ESG are more likely to express an opinion about it than those with less familiarity, they are just as likely to be divided on the question — 36% viewing ESG positively and 35% negatively.

Similarly, adults who report owning stock, about six in 10 respondents in the current poll, are more likely to have an opinion about ESG than non-stock owners, but they are just as divided on the merits of promoting ESG in business and investing….

When asked whether retirement fund managers should only take financial factors into account when making investment decisions or also consider ESG factors, the public leans toward the former (48% vs. 41%, respectively). Stock owners’ views on this are nearly identical to the national averages.

Adults familiar with ESG are closely split on the question, with 50% preferring fund managers to limit their investing criteria to financial factors while 46% want ESG factors considered. Those not familiar with ESG lean more strongly toward only considering financial factors but are also more likely to have no opinion on the question….

Adoption of ESG principles has been promoted by the Biden administration as well as the Business Roundtable (a leading American business lobby), the United Nations, and other prominent organizations in the U.S. and globally. The leaders and companies embracing ESG in investing have espoused it as a way to minimize investment risk while promoting social goods. Yet critics on the political right decry it as a system designed to achieve progressive goals at the expense of shareholders, and have advanced anti-ESG legislation in many states.

While this political backdrop is evident in the Gallup data, it does not appear to be an overwhelming factor driving the public’s interest in or views about ESG.

–There is no difference between Republicans’ and Democrats’ familiarity with ESG, as just under four in 10 in each group say they are very or somewhat familiar with it and an equal proportion are not at all familiar.

–Further, awareness of ESG hasn’t increased much among either group since 2021, when 33% of Republicans and 38% of Democrats said they were very or somewhat familiar with it.

–Republicans are far more likely to have a negative than positive view of ESG, while the reverse is true of Democrats, but majorities of both groups say they are unsure.

–Only when asked to choose between two modes of investing — with or without taking ESG criteria into account — do majorities of Republicans and Democrats take opposing sides. Sixty-four percent of Republicans think fund managers should only consider financial factors when choosing investments, while 59% of Democrats think they should include 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 Washington, D.C.

NCPPR sues the SEC, alleging bias

The National Center for Public Policy Research (NCPPR), a non-profit organization, on April 28 filed a lawsuit against the Securities and Exchange Commission (SEC), alleging that the Commission was biased against NCPPR because the organization files shareholder proposals that are opposed to ESG.

American First Legal Services, co-counsel for NCPPR with Boyden Gray & Associates, describes the case against the SEC as follows:

NCPPR is a communications and research foundation that focuses on providing free market solutions to public policy problems and is a longtime Kroger Co. (“Kroger”) shareholder.

In its “Framework for Action: Diversity, Equity & Inclusion,” Kroger indicates that it “strives to reflect the communities we serve and foster a culture that empowers everyone to be their true self.” As part of its effort to associate its brand with diversity and inclusion, Kroger’s board adopted The Kroger Co. Policy on Business Ethics, which commits Kroger “to a policy of equal opportunity for all associates without regard to race, color, religion, gender, national origin, disability, sexual orientation, or gender identity.”

NCPPR sent a proposal to Kroger requesting, as shareholders, that Kroger issue a public report detailing the potential risks associated with omitting “viewpoint” and “ideology” from its written equal employment opportunity (EEO) policy. 

Kroger submitted a letter to the SEC’s Division of Corporation Finance arguing that the Proposal “deals with matters relating to the Company’s ordinary business operations” because it pertains only to “Kroger’s management of its workforce and policies concerning employees.” Kroger, and the SEC, effectively turned a blind eye and blocked the proposal, ignoring the fact that conservatives often face employment discrimination due to political ideology, while acknowledging other factors like “gender.” 

NCPPR argued that the SEC was engaging in viewpoint discrimination by giving the green light to identical proposals about certain forms of discrimination (e.g., against sexual orientation and gender identity) while agreeing companies could exclude proposals about other forms of discrimination that are at least as significant to society (e.g., viewpoint and ideology, especially against conservatives).

NCPPR operates the Free Enterprise Project, which, by its own description, “files shareholder resolutions, engages corporate CEOs and board members at shareholder meetings, petitions the Securities and Exchange Commission (SEC) for interpretative guidance, and sponsors effective media campaigns to create the incentives for corporations to stay focused on their missions.”

FEP Director Scott Shepard says that the SEC has been discriminating against it and others, favoring ESG in its policy:

For years we’ve watched the SEC staff discriminate against center/right proposals, including ours. In doing so and in failing to provide meaningful explanations for its decisions, it has violated the law in ways that breach its statutory duties and our First Amendment rights. This action is a first step in ending that illegal discrimination.

In the states

Louisiana attorney general launches ESG investigation

Louisiana Attorney General Jeff Landry (R) launched an investigation on April 25 into Climate Action 100+, which describes itself as “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.” Landry’s office says the investigation seeks to determine whether some asset management companies that are part of the initiative have violated their fiduciary duties by focusing on ESG investment factors:

Landry’s office on Tuesday announced a “multi-pronged” effort focusing on the Climate Action 100+ Steering Committee, specifically scrutinizing Franklin Templeton and the California Public Employees’ Retirement System. The investigation will look into whether the groups breached their obligations to investors by prioritizing climate initiatives….

“ESG investing puts politics over people and raises significant concerns that companies guided by these green-energy fantasies may be engaging in unfair and deceptive practices that harm Louisiana consumers,” Landry said, according to the Washington Times. “Franklin Templeton is deeply embedded in Climate Action 100+; and we are troubled that, by focusing on the radical ESG agenda, it may be violating its fiduciary duties to shareholders in our state.”…

Franklin Templeton has some $1.5 trillion in assets under management, while CalPERS, the country’s largest public pension fund, had more than $440 billion in assets under management as of last year.

Last year, congressional Republicans, led by Rep. Jim Jordan (R-OH), sent a letter sent to executives of the steering committee for Climate Action 100+ demanding documents that show the group’s network of influence. In the letter, they said the coalition “seems to work like a cartel to ‘ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.’”

Kansas bill opposing ESG to become law

A Kansas bill aimed at opposing the influence of ESG in state investments will become law.  The bill was passed by both houses of the legislature on April 6, but there was some question about whether Gov. Laura Kelly (D) would veto it. Last week, the governor announced that she would not veto the bill, meaning it will now be enacted:

The law restricts the $24.3 billion Kansas Public Employees Retirement System, Topeka, from entering into any contracts with money managers that consider environmental, social and governance factors.

Specifically, the bill prohibits the system from ESG factors involving restrictions in investments in fossil fuel-based energy, nuclear energy, agriculture and lumber production, mining and greenhouse gas emissions, firearms manufacture or sales, facilitating or assisting with abortion or gender reassignment.

In Kansas, a bill can become law whether the governor signs a bill or declines to do so. In a statement on Monday, Ms. Kelly said: “Because I have reservations about the potential unforeseen consequences of House Bill 2100 for the state and for local governments, I will allow the bill to become law without my signature.”

The bill passed the House of Representatives 76-47 and the Senate 27-12 on April 6.

Indiana House passes bill opposing ESG in state investments

The Indiana House passed a bill on April 24 restricting the use of ESG funds in state investments, following the lead of the state Senate. The bill now goes to Gov. Eric Holcomb (R) for consideration.

Indiana Republicans pushed through a proposal Monday taking a stand against socially and environmentally conscious investing although disagreements within their legislative majorities narrowed it from what conservatives first sought.

House members voted 66-29 for final passage of the bill aimed at preventing leaders of the state’s pension funds for teachers and other government workers from investing any of their some $45 billion with firms that consider environmental, social and governance principles in their investment decisions….

Such a ban is needed in Indiana to ensure that “financial returns trump all,” said Republican Rep. Ethan Manning of Logansport, the bill’s sponsor.

“Our concern is when these large asset managers on Wall Street are using their outsized market power to force decisions on companies when it’s not best for them,” Manning said….

The Indiana Chamber of Commerce, the state’s largest business group, and some other business organizations objected to earlier versions of the bill, calling proposed investment limitations “anti-free market.” An analysis of the first version of Manning’s proposal projected that the limitations would cost the state pension system $6.7 billion over 10 years.

Business groups dropped much of their opposition after the initial proposal was rewritten and the GOP-dominated Senate later removed provisions such as one that would have had the state treasurer’s office compile and publish a list of companies it found had made ESG investment commitments….

Democratic Rep. Carey Hamilton of Indianapolis argued the anti-ESG bill was “carving out protections for certain sectors for political reasons.”

“We’re creating bigger government to oversee a system that works today for our retirees,” Hamilton said.

In academia

NYU business professor criticizes ESG at Morningstar conference

Last week, investment research company Morningstar held its annual conference in Chicago, hosting Aswath Damodaran, among others. Damodaran, a professor of finance at NYU’s Stern School of Business and ESG opponent, criticized the investing strategy in a talk. Morningstar is the parent company of Sustainalytics, one of the world’s foremost ESG rating services.

ESG is a failure, its advocates are to blame, and the concept should be retired, according to Damodaran….

Damodaran is known as the “dean of valuation” for his analysis of security prices. He touched on the topic of valuations, but his most provocative remarks were about ESG.

Once the “S” was put in the middle of ESG, the concept was doomed, he said. It is impossible to achieve a consensus on any social issue, much less the full range of socially responsible concerns that permeate the ESG landscape.

Indeed, the fundamental issue for Damodaran is that there is no consensus about what constitutes “good” or “bad” companies when it comes to ESG….

Advisors are putting trust in a scoring system that companies will “game,” he said. “We created a scoring system that makes us feel we are doing good rather than a system that does good.”

“The best thing would be to retire the concept,” he said.

Damodaran said that ESG proponents oversold the concept when they claimed that ESG could deliver excess returns (alpha) along with values-based portfolio construction. A constrained strategy (like ESG) cannot beat an unconstrained one. The positive alpha that has benefitted some ESG investors is a result of outsized flows into those strategies, driven in part by aggressive asset management marketing.

Once those flows subside, returns from ESG investing will suffer.

“If your clients think they can earn alpha,” he said, “bring them back to reality. You can’t claim ESG is always good for returns.”…

Eric Hofer, a great American thinker, once wrote that, “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.”

Damodaran has put ESG in the same context: “These ideas start by repackaging an existing concept or measure and adding a couple of proprietary tweaks that are less improvement and more noise. Then they get acronyms, before being sold relentlessly.”

London Business School professor also pushes back against ESG

ESG Clarity published an article on April 27 covering London Business School finance professor Alex Edmans’s comments criticizing ESG on the “ESG Out Loud” podcast on April 6. Edmans argued that ESG creates conditions for confusion in the market:

You cannot reduce the cost of capital and improve investor returns, London Business School finance professor Alex Edmans has said.

Speaking in an episode of the ESG Out Loud podcast, Edmans said despite “basic finance theory” suggesting that if you are having positive impact by reducing a company’s cost of capital, you must be reducing your return because the company’s cost of capital is the return to investors, many investors, finance professors and policymakers are still making this claim.

“This is not possible. And if you can only have one or the other, that’s fine. Just be honest about it. When I go and buy organic food, I do this because I think it’s good for society. I don’t think it’s good for my wallet, but that’s fine because my motivation is not a financial one, it’s an impact one.”

Acknowledging the similarities between his points on this matter and those of ex-BlackRock CIO for sustainable investing Tariq Fancy, Edmans said, “You can’t have both [impact and improving returns] but funds that claim they can are likely to get more investors than those that don’t….

Clarity on terminology will help, Edmans said. “The phrase ESG investing is confusing. For some people, ESG investing is just investing, it’s a way of creating long-term financial returns. It’s not to save the world.

“And then people like Larry Fink have climate risk is investment risk. He says ESG is capitalism, it’s about creating financial value.

“Then there’s a separate reason for ESG, which is to create social value and to change the world, for example to encourage companies to decarbonise, change the mix of their workforce, even if this doesn’t improve returns.”

Edmans suggested instead using the phrases “intangible investing”, which uses intangible information but tries to create long-term returns; “impact investing”, which involves financial sacrifice; and “values-based investing”, where you can divest from sectors or companies you don’t like but realise you’re not depriving them of capital.

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., and around the world

The EU moves to pass ESG due diligence bill

The European Union is getting closer to passing a bill that will require greater due diligence on the part of most businesses with respect to ESG-related factors. The bill could expose companies to greater liability and penalties for certain ESG violations such as environmental damage caused by a corporation (or damage caused by a company that a corporation does business with). Some European businesses are pushing back against the bill:

“Some of the most powerful lobbyists in Europe’s finance industry are preparing to fight the passage of an ESG bill, after it won early backing from European Union lawmakers.

The Association for Financial Markets in Europe, whose members dominate the region’s debt and equity capital markets, says a planned EU law designed to make it easier to sue companies for ESG violations ignores the unique status of financial firms. 

The Corporate Sustainability Due Diligence Directive (CSDDD) moved a step closer to becoming law last week, after the EU Parliament’s legal affairs committee struck a preliminary agreement to cover all sectors, including the finance industry. If passed, the law will force companies to pay a lot more attention to their value chains.

In practice, that means that human rights abuses or environmental damage that occurs in an EU corporation’s value chain may expose that company to civil liability or regulatory penalties.

CSDDD has the potential to be one of the EU’s most far-reaching pieces of environmental, social and governance rulemaking. While ESG regulations passed to date impose disclosure requirements on companies, the due diligence directive would force them to act on the information they’re disclosing. If they don’t, they can be punished by regulators and sued by stakeholders.

Lara Wolters, the EU Parliament member responsible for ushering CSDDD through the chamber, said she’s bracing for a “tough” battle with the finance industry. She also said there’s too much at stake for lawmakers to cave.

The power that banks, asset managers and insurers have “is huge,” Wolters said. So to suggest “that power isn’t going to be used to try to affect any positive change” would be “crazy,” she said.

The next step for CSDDD is a formal vote of the parliament committee, which is due to take place on Tuesday. After that, it goes to the full chamber and then to the European Council.”

Biden executive order incorporates environmental justice into federal agency missions

Last week, President Biden issued an executive order creating a White House Office of Environmental Justice and directing all federal agencies to prioritize what it described as environmental justice in their policymaking whenever and however possible:

“President Biden will sign an executive order Friday in the Rose Garden that will direct every agency of the federal government to incorporate “environmental justice” into its mission, the White House said. 

The White House has invited environmental justice leaders, climate advocates and community leaders to join the president at the signing ceremony today. There, Biden will reaffirm his administration’s commitment to fighting climate change and correcting “disproportionate environmental harms,” including those inflicted by a “legacy of racial discrimination including redlining.”  

“The executive order will direct agencies to address gaps in science and data to better understand and prevent the cumulative impacts of pollution on people’s health. It will create a new Office of Environmental Justice in the White House to coordinate all environmental justice efforts across the federal government. And it will require agencies to notify nearby communities in the event of a release of toxic substances from a federal facility,” a White House official said….

The new White House Office of Environmental Justice created by Biden’s action will be led by a Federal Chief Environmental Justice Officer, who will be tasked with coordinating “environmental justice” policy across the whole federal government….

The White House contrasted Biden’s planned action with policies favored by House Republicans and Speaker Kevin McCarthy, R-Calif., accusing “extreme MAGA Republicans” of being in the pocket of Big Oil.” 

GOP presidential candidate criticizes Biden administration for encouraging ESG

The day after President Biden’s environmental justice announcement, the New York Post published an op-ed by a challenger for the White House, Vivek Ramaswamy. The op-ed – which is an excerpt from Ramaswamy’s new book Capitalist Punishment: How Wall Street is Using Your Money to Create a Country You Didn’t Vote For – criticized the administration for, in Ramaswamy’s view, tilting the scales on ESG and steering public funds to pet projects using the investment strategy. Ramaswamy – an entrepreneur and the founder of the self-described post-ESG asset management firm Strive – announced his bid for the Republican presidential nomination earlier this year:

“It’s no surprise that liberal politicians have been some of environmental, social, and governance (ESG) policies’ strongest proponents.

ESG-friendly politicians often co-opt pension fund money for political ends.

However, that’s not the only power they have.

Elected officials can also wield influence through executive orders, agency directives, and letter writing to pave the way for ESG asset managers to access the back door of corporate America and sometimes even shove those managers through.

That’s exactly what President Biden has done.

The first thing he did when he took office was pick up his executive order pen.

He used it to direct his federal agencies to revisit their rules with an eye toward making them more ESG-friendly.

There was no need for messy bipartisanship, congressional compromises, or involving the legislative branch at all.

Why bother with the tedious, constitutionally approved method of making new laws when there is an army of federal bureaucrats at your disposal?

On day one of his presidency, he lamented “the unbearable human costs of systemic racism” and mandated an “ambitious whole-of-government equity agenda.”…

The same day, he rejoined the Paris Agreement, and simultaneously issued another order directing that all federal agencies “immediately commence work to confront the climate crisis.”…

Within a week, he issued yet another order, promising “bold, progressive action that combines the full capacity of the Federal Government with efforts from every corner of our Nation, every level of government, and every sector of our economy.”  

He charged every federal agency with appointing an “Agency Chief Sustainability Officer” and announced that the United States would be “promoting the flow of capital toward climate-aligned investments and away from high-carbon investments.”  

By May, his executive orders became even more specific, focusing federal climate efforts on the financial sector in particular.

Through strokes of the executive pen, a Green New Deal that would never be approved by Congress would be pushed on corporate America through Wall Street, guided by the heavy hand of federal agencies at every turn.

Following the orders of the new climate commander-in-chief, the government joined the ESG battle. For the most part, federal agencies were pleased to be conscripted into service.

The Department of Labor was one of the first agencies to respond….

There’s another little-known federal agency that is playing a big role in allowing ESG to go unchecked: the Office of the Comptroller of the Currency (OCC).

The agency is tucked inside the Department of the Treasury and is tasked with regulating US banks.

As ESG proponents know, access to banking services from major financial institutions is a critical part of any business—if a business can’t open a bank account, process credit card payments, or get lines of credit, it can’t exist.

Cutting off banking services is a death blow and one that can be delivered without political or market accountability….

So through the OCC’s somewhat obscure rule-making and guidance-issuing process, the Biden administration has handed ESG activists their sledgehammer back.

Banks, like asset managers, are simply one more tool that politicians can manipulate to further political agendas that Congress would never enact.”

In the states

Florida advances bill opposing ESG

The Florida Senate passed a bill on April 19 that would prohibit the state and local governments from using ESG in debt financing and investing. The bill now goes to Governor Ron DeSantis (R):

“Florida’s Republican-controlled Senate approved on Wednesday a bill that bans state and local governments from using environmental, social, governance criteria when selling debt or investing public money. The legislation, which had already cleared the state’s House of Representatives last month, will now be brought to DeSantis for his signature.

The 44-year-old governor has attacked ESG as part of a larger conservative agenda at the center of his likely 2024 GOP presidential run. DeSantis, like other Republican officials, has criticized Wall Street’s ESG policies as “woke capitalism.” His administration has pulled about $2 billion from BlackRock Inc. and singled out Chief Executive Officer Larry Fink, one of Wall Street’s leading ESG advocates.

The new legislation prohibits Florida municipalities from selling bonds tied to ESG projects, as well as imposing restrictions on seeking ESG ratings. In 2022, Florida issuers sold $13 billion of long-term bonds, making it the fourth-largest issuer in the US, behind California, New York and Texas.

The law also bars Florida’s public money from being deposited in financial institutions that are deemed to pursue “social, political, or ideological interests” in their investment decisions. Florida had almost $37 billion in state deposits, with Wells Fargo & Co. holding the biggest individual amount, $6.5 billion, according to data from Florida’s Bureau of Collateral Management.”

On Wall Street and in the private sector

Some companies are hoping to avoid ESG discussions during annual meeting season 

According to Axios, this spring – during the annual general meeting season and the accompanying votes on shareholder proposals – many companies are trying to avoid discussions related to ESG or other perceived controversial matters:

“Companies don’t want to talk about their environmental, social and governance goals anymore, experts in ESG and communications tell Axios….

Promoting ESG policies was once an easy layup to score good press — and theoretically move toward bettering society — but now it’s a way to court controversy, the ire of politicians, and attention from well-funded anti-ESG groups….

Anti-ESG forces are in full swing this proxy season — the time of year when public companies host their annual meetings, and shareholders vote on a slate of investor proposals.

Investors have filed 68 anti-ESG proposals this year to date — compared to 45 in all of 2022, per data from the Sustainable Investments Institute, a nonprofit.

About one-third of the anti-ESG proposals this year are focused on diversity — asking companies, including Apple, JPMorgan, Coca-Cola and McDonald’s, to report on the “risks” that their anti-discrimination or racial justice efforts pose to their business.

Two proposals ask companies to avoid public policy positions unless there’s a business justification. And a handful are asking public companies to report the risks posed by attempting to achieve net zero or decarbonization goals….

“Companies should be prepared to deal with ESG backlash,” the Conference Board warned in its recent proxy season preview.”

Nevertheless:

“Companies are soldiering on with diversity or climate initiatives they think are important — or good for business — but they’re just less willing to talk about it.

Worth noting: The retreat isn’t simply about anti-ESG efforts. Businesses are also more inclined to stay mum as regulators like the SEC start paying more attention to companies’ ESG-related claims.

The bottom line: ESG efforts aren’t going away, but you might see fewer press releases and puff pieces about the issue.”

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

What have states done on ESG?

The Daily Signal (a publication of the Heritage Foundation) on April 14 published an outline of the state actions taken so far in 2023 related to ESG:

“The governors of Utah, Kentucky, West Virginia, and Arkansas have so far in 2023 signed legislation into law aimed at combating environmental, social, and governance policies.

More than a dozen states have introduced or are considering taking action on similar bills, including Montana, Kansas, and Florida….

Republican Utah Gov. Spencer Cox signed two bills into law on March 14.

SB 96 “addresses fiduciary duties for funds managed by public entities.”…

The law will take effect on May 3.

SB 97 relates to economic boycotts and “addresses public entity contract requirements.”…

The law also takes effect on May 3.

Republican Kentucky Gov. Andy Beshear signed HB 236 into law on March 24.

“Kentucky now has the strongest anti-ESG legislation in the nation. For many years, pension investments were about maximizing returns,” Kentucky State Treasurer Allison Ball, a Republican, told The Daily Signal in an emailed statement. “Recently, however, there has been a destructive shift in investment methodology to use the savings of Americans as financial muscle to push ideological causes through the ESG movement.”…

Republican West Virginia Gov. Jim Justice signed HB 2862 into law on March 28.

“The purpose of this bill is to ensure that all shareholder votes by or on behalf of the West Virginia Investment Management Board and the Board of Treasury Investments are cast according to the pecuniary interests of investment beneficiaries,” a summary of the bill says….

Republican Arkansas Gov. Sarah Huckabee Sanders signed HB 1307, which is “concerning the regulation of environmental, social justice, or governance scores; and to authorize the treasurer of state to divest certain investments or obligations due to certain factors,” into law on March 30.

Other states that have introduced or are considering similar bills include South Carolina, Iowa, Oklahoma, Indiana, Texas, Tennessee, Ohio, Missouri, Arizona, and Alabama.”

New Hampshire joins ESG pushback

New Hampshire Gov. Chris Sununu (R) signed an executive order last week directing state executive agencies to invest their funds based on expected financial returns (not based on ESG investing criteria), making the state the latest to push back against ESG in public investments:

“Just weeks after the Biden administration imposed new rules promoting ESG investing by retirement fund managers, Gov. Chris Sununu issued his own order blocking state agencies under his control from joining in the “woke” investment movement.

“Executive branch agencies shall prioritize investment decisions that maximize financial returns and minimize risk, as part of their fiduciary duty to act in the best interest of the State and the beneficiaries of the state’s trust funds,” Sununu’s order read in part. By mandating “maximizing returns,” Sununu is effectively banning the “environmental, social, and corporate governance” (ESG) investment criteria.

“The most important responsibility we have is getting the best return for our retirees. And this ESG stuff doesn’t get the returns,” Sununu told NHJournal Tuesday. “It hurts returns, it increases risk, and it doesn’t fulfill the mission.”

Sununu’s executive order also instructs relevant state agencies to review their policies to ensure “no funds or state-controlled investments are invested with firms that invest New Hampshire funds in accounts solely based on ESG criteria.” And it instructs State Treasurer Monica Mezzapelle to “report on an annual basis” to the governor and legislature “regarding compliance with the duty to make investment decisions based upon the fiduciary duty to maximize short or long-term financial benefits for the state.”

The order is just the latest action the Sununu administration has taken to oppose the new ESG rule. Last month, Sununu joined 18 fellow GOP governors in a letter to the Biden administration, pledged to fight the move….

And his Attorney General, John Formella, is part of a lawsuit attempting to block the new rule from being applied.”

South Carolina House advances bill opposing ESG

A bill in South Carolina that would require the state pension system to consider only pecuniary factors in its investments and to exercise its shareholder proxy rights has passed the state House and moves now to the Senate:

“[I]n South Carolina, the state’s House of Representatives passed the ESG Pension Protection Act. The bill requires South Carolina’s retirement system to consider only “pecuniary factors” when making investment decisions and prevents it from considering ESG factors.

The bill would also require the state’s retirement system to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of the system. To accomplish this, the retirement system would have to manage the proxy voting in-house, hire an external proxy adviser or fully delegate the proxy voting to an external investment manager.

According to a fiscal analysis of the bill by the South Carolina Revenue and Fiscal Affairs Office, managing the proxy voting could cost the retirement system as much as $1 million if it does it in-house. It would cost the system $292,000 to hire an external proxy adviser, and delegating the proxy voting to an external investment manager would be of no cost to the retirement system. The report added that the retirement system is not sure which of the three scenarios would fulfill the requirements of the bill.”

Not every anti-ESG effort is successful, even in red states

The Washington Times ran a piece on April 12 covering state-level efforts opposing ESG. The article mentioned some examples of Republican-governed states that tried to push back against ESG but were unsuccessful in doing so:

“Rooting out ESG-based investing is proving to be more difficult than conservatives figured, and early efforts have faltered even in Republican-led states.

State pension managers, banking associations and business groups in more than a half-dozen conservative states have warned that bills to blacklist pro-ESG asset managers and investment funds could cost retirees and hurt local banks.

Mississippi, North Dakota and Wyoming killed anti-ESG bills, and Kansas and Indiana diluted legislation….

Republicans in Arizona, Texas and Kentucky have also faced resistance from state and county money managers.

West Virginia Treasurer Riley Moore, a Republican, faced headwinds as he championed a bill prohibiting state-managed funds from supporting ESG issues in the shareholder proxy voting process. The bill was recently signed into law.

Mr. Moore suggested in an interview with The Times that the pushback stemmed from “fearmongering” and outside influences….

Wyoming, which defeated anti-ESG bills this year, enacted a law in 2021 prohibiting financial institutions from discriminating against firearms-related businesses. North Dakota also tanked anti-ESG legislation this year but enacted a law in 2021 to prohibit state pensions from making “social investments” unless they are shown to perform as well or better than similar non-social investments.

Meanwhile, nearly a dozen liberal states have taken action promoting ESG and divesting from specific industries.”

On Wall Street and in the private sector

Wall Street banks can’t live up to expectations

A newly released analysis by Ceres and Transition Pathways Initiative – two ESG-supporting activist groups – discusses how difficult it can be for banks to keep their ESG promises and meet the expectations of those who rely on the investment strategy:

“The six biggest banks on Wall Street are failing to live up to a key plank of their ESG commitments to stakeholders, according to a joint study published on Wednesday.

An analysis by Ceres and the Transition Pathways Initiative has found that JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. have yet to align their oil and gas financing goals for 2030 with a scenario that keeps global warming within the critical threshold of 1.5C.

Banks’ continued support for fossil fuels, which is the primary source of planet-warming pollution, has left the industry and the executives who dominate it vulnerable to criticism from shareholders and activist groups. At the same time, the finance sector is under intense pressure from the American right as the Republican Party penalizes lenders for appearing to embrace environmental, social and good governance goals, such as reducing financed emissions.

“Our analysis highlights just how difficult it is for banks and their stakeholders to assess and compare how much progress they’re making on real oil and gas emissions reductions,” said Blair Bateson, director of the Ceres Company Network at Ceres. “And it goes beyond these six banks.”

BloombergNEF estimates that the ratio of clean-energy lending and equity underwriting relative to fossil fuels needs to hit 4 to 1 by the end of the decade to live up to the Paris climate agreement. But by the end of 2021, that ratio for the finance industry was roughly 0.8 to 1, BloombergNEF said in February….

The banks singled out in the analysis by Ceres and TPI are all members of the Net Zero Banking Alliance, a coalition that requires signatories to set interim targets for the most carbon-intense sectors on their balance sheets. All six have set 2030 goals for the oil and gas sectors.”

ESG issues impacting shareholder meetings

Bloomberg Law reports that ESG and ESG-related matters are playing a significant role in this year’s shareholder meeting season. The report says shareholders (and shareholder groups) are developing proxy proposals that support and oppose ESG political issues and certain types of political spending:

“Annual meetings kicked off with a bang this year as companies and their executives confronted increasingly thorny questions from both liberal and conservative stakeholders over a wide range of environmental, social, and governance topics including diversity, abortion, and climate change.

Walt Disney Co. Chief Executive Officer Bob Iger dove into the political debate at the company’s annual meeting last week, calling Florida Governor Ron DeSantis’ pushback of the entertainment giant’s support for LGBTQ rights as “anti-business” and “anti-Florida.” Royal Bank of Canada found itself on the defensive at its annual meeting two days later, as the bank faced a volley of questions from angry proxy holders about its fossil fuel investments and the impact of its business practices on Indigenous people and people of color.

Political friction at shareholder meetings is not new, but appears to be “coming back into vogue,” said David Webber, a corporate law professor at Boston University. Webber noted that there’s a long history of confrontational debates at shareholder meetings including over gay rights and segregation in previous decades. “I think we’re definitely seeing a new wave of it now,” he said….

Companies including Eli Lilly and Co and Coca-Cola Co. are among those that face politically sensitive shareholder proposals on abortion and political spending at upcoming annual meetings. Home Depot Inc. faces two diversity-related proposals this year while annual meetings at Bank of America Corp and Wells Fargo & Co will see multiple shareholder proposals on climate change impacts from lending and investment activities.

Conservatives, who historically are less active in shareholder campaigns, hope to sway corporate agendas too. One shareholder has even put forth a proxy proposal that calls on Home Depot’s management to make a commitment to avoid supporting or taking a public position on “any controversial social or political issues.”…

The volume of conservative shareholder proposals has risen in recent years, a new trend in the predominantly liberal shareholder activism space. These proposals typically don’t receive much investor support. But proposals opposing environmental, social and governance policies rose 60% since last year, according to the Proxy Preview 2023 report from March.”

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.

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.

Biden vetoes Congressional Review Act resolution that aimed to block ESG retirement plan rule

President Joe Biden (D) issued the first veto of his presidency on March 20, blocking Congress’s attempt to rescind the Labor Department’s rule allowing for ESG investing by managers of ERISA-governed retirement plans:

President Joe Biden issued the first veto of his presidency Monday in an early sign of shifting White House relations with the new Congress since Republicans took control in January. He’s seeking to kill a Republican measure that bans the government from considering environmental impacts or potential lawsuits when making investment decisions for Americans’ retirement plans.

It’s just the latest manifestation of the new relationship, and Biden is gearing up for even bigger fights with Republicans on government spending and raising the nation’s debt limit in the next few months.

The measure vetoed by Biden ended a Trump-era ban on federal managers of retirement plans considering factors such as climate change, social impacts or pending lawsuits when making investment choices. Because suits and climate change have financial repercussions, administration officials argue that the investment limits are courting possible disaster.

Critics say environmental, social and governance (ESG) investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. Republicans in Congress who pushed the measure to overturn the Labor Department’s action argue ESG is just the latest example of the world trying to get “woke.”

Biden, in a video released by the White House, said he vetoed the measure because it “put at risk the retirement savings of individuals across the country.”

Manchin pushes back against Biden’s veto

Sen. Joe Manchin (D-W.Va.), one of the two Senate Democrats to vote for the bill blocking the ESG rule, argued that the Biden administration “continues to prioritize their radical policy agenda over the economic, energy and national security needs of our country, and it is absolutely infuriating”:

Sen. Joe Manchin (D-W.Va.) teed off on President Biden’s decision earlier on Monday to veto a bill that would have nixed a Labor Department rule on environmental, social and governance (ESG) investing.

Manchin, who was one of two Senate Democrats to vote with Republicans to overturn the rule on March 1, called Biden’s decision “absolutely infuriating” in a statement and panned the administration for putting its “radical” and “progressive agenda” ahead of the country’s needs. 

“This Administration continues to prioritize their radical policy agenda over the economic, energy and national security needs of our country, and it is absolutely infuriating,” said Manchin, who is up for reelection next year. “West Virginians are under increasing stress as we continue to recover from a once in a generation pandemic, pay the bills amid record inflation, and face the largest land war in Europe since World War II.”

“The Administration’s unrelenting campaign to advance a radical social and environmental agenda is only exacerbating these challenges. This ESG rule will weaken our energy, national and economic security while jeopardizing the hard-earned retirement savings of 150 million West Virginians and Americans,” Manchin continued. “Despite a clear and bipartisan rejection of the rule from Congress, President Biden is choosing to put his Administration’s progressive agenda above the well-being of the American people.”

Opposition group campaigns against veto

Consumers’ Research, an advocacy group that opposes ESG investing, ran a mobile billboard campaign ahead of Biden’s expected veto criticizing ESG and the Biden administration’s approach to ESG policy:

An advocacy group that opposes environmental, social and governance (ESG) investing on Tuesday launched a mobile billboard campaign around Washington, D.C., ahead of President Biden’s expected veto of legislation targeting the investment practice.

Consumers’ Research, a leading anti-ESG group, is funding mobile billboards and a targeted digital ad campaign criticizing the use of the principles among major money managers such as BlackRock. The mobile billboards will circulate around Capitol Hill and downtown D.C.

The mobile billboards will feature images that say “What does ESG really stand for?” with acronyms like “Erasing Savings Growth” and “Elitists Socialists Grifters,” according to images first shared with The Hill.

“I applaud House leadership and the bipartisan efforts in the Senate that pushed this legislation to the finish line,” Will Hild, director of Consumers’ Research, said in a statement to The Hill. “Unfortunately, President Biden is going to use his first veto to further the progressive agenda instead of putting the interest of the American people first.”

In the states

DeSantis leads 19 states in ESG pushback

Florida Gov. Ron DeSantis (R) announced on March 16 that he and the governors of 18 other states had agreed to join forces to push back against ESG investing and what they view as pro-ESG federal policies:

Florida Gov. Ron DeSantis (R) on Thursday announced an alliance with 18 other states to push back against President Biden’s support for environmental, social and corporate governance investing, known as ESG.

The states argue that Biden’s backing for socially-conscious ESG investing, under which investors weigh sustainability and ethical considerations, is a threat to the U.S. economy.

DeSantis joins with the governors of Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming in what his office called “an alliance to push back” against Biden’s ESG “agenda.”

“The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom, and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance, and the everyday economy,” the states wrote in a joint statement.

The 19 states in their joint statement said they plan to lead state-level initiatives “to protect individuals from the ESG movement,” including potentially blocking ESG at the state and local levels and withholding state pension funds and state-controlled investments from firms that use ESG.

“We as freedom loving states can work together and leverage our state pension funds to force change in how major asset managers invest the money of hardworking Americans, ensuring corporations are focused on maximizing shareholder value, rather than the proliferation of woke ideology,” the states wrote.

Kansas legislature considers proposals to restrict ESG considerations in public pensions

Kansas state lawmakers have been trying to develop a bill restricting ESG considerations in public pensions. In an effort to slow or amend such legislation, some businesses and others cited a report suggesting that banning ESG could hurt Kansas public pensioners:

Conservative Republicans who want to thwart socially and environmentally conscious investing are now being pushed to water down their proposals after backlash from powerful business groups and fears that state pension systems could see huge losses.

In both Kansas and Indiana, where the GOP has legislative supermajorities, bankers associations and state chambers of commerce criticized the strongest versions of anti-ESG legislation currently under consideration as anti-free market.

In Kansas, their opposition prompted a Senate committee’s chair to drop the toughest version of its bill — applying anti-ESG rules to firms handling private investments — before hearings began this week. He also canceled a Thursday discussion of a milder version of an anti-ESG bill after the head of the state pension system for teachers and government workers warned that it could see $3.6 billion in losses over 10 years if the bill were passed….

“This is the underlying political nature of this,” said Bryan McGannon, acting CEO and managing director for US SIF: The Forum for Responsible and Sustainable Investment. “They really aren’t thinking about the consequences of the kind of the real world impacts of what this means in the financial system.”

About one-eighth of U.S. assets being professionally managed, or $8.4 trillion, are being managed in line with ESG principles, according a report in December from US SIF, which promotes sustainable investing.

At least seven states, including Oklahoma, Texas and West Virginia, have enacted anti-ESG laws in the past two years. GOP Govs. Ron DeSantis of Florida and Greg Gianforte of Montana also have moved to ensure their states’ funds aren’t invested using ESG principles.

Discussions about the responsibilities of managers handling private investments are also slowing ESG opposition efforts in Kansas:

Republican lawmakers pushing to prevent Kansas from investing its funds using socially and environmentally conscious principles disagree about also imposing rules for investment managers handling private funds, complicating their efforts to thwart what they see as “woke” investing.

Committees in the Kansas House and Senate this week approved competing versions of anti-ESG legislation, and the two chambers could debate them as early as next week. ESG stands for environmental, social and governance and those considerations have become more prominent in investing in recent years, sparking a nationwide backlash from conservative Republicans.

The Kansas Senate’s version of the anti-ESG measure would require private money managers to get their clients’ written consent before investing their funds along ESG principles. The House bill contains no such provision.

The issue of requiring managers of private funds to disclose their ESG activities to clients or to get clients’ verbal or written consent to use them appears to be the last major sticking point among Republicans in the GOP-controlled Legislature. They’ve already backed off the toughest version of the anti-ESG legislation because of opposition from powerful business groups, and have rewritten both bills to prevent projected investment losses of $3.6 billion over 10 years for the pension fund for Kansas teachers and government workers.

In the spotlight

BlackRock CEO writes open letter to investors

BlackRock CEO Larry Fink is known for his annual open letters to the CEOs of corporations and for his letters to investors. This year, Fink sent only one letter— to investors. Among other things, Fink highlighted efforts at BlackRock that he says will make it easier for investors to vote their stock shares:

In recent years, I have written two letters each year – one on behalf of our clients to CEOs and the other to BlackRock shareholders. In November, on the anniversary of BlackRock introducing Voting Choice, I wrote to both CEOs and our clients to share my views on the transformative power of choice in proxy voting.

As we start 2023, it is clear to me that all of our stakeholders – BlackRock shareholders, clients, employees, partners, the communities where we operate, and the companies in which our clients are invested – are facing so many of the same issues. For that reason, this year, I am writing a single letter to investors….

We continue to innovate in a variety of areas to expand the choices we offer clients. Some of our clients have expressed interest in a more direct role in the stewardship of their capital, and we have sought to deliver solutions that enable them to vote their shares. As I wrote last year to clients and corporate CEOs, I believe that, if widely adopted, voting choice can enhance corporate governance by bringing new voices into shareholder democracy.

BlackRock has been at the forefront of this innovation for years, and we have seen other asset managers follow our lead and adopt similar efforts. Nearly half of our index equity assets under management are now eligible for Voting Choice. This includes all the public and private pension plan assets we manage in the U.S., as well as retirement plans serving more than 60 million people around the world. Clients representing over $500 billion in AUM have chosen to participate in Voting Choice to express their preferences.

When I first started writing letters to the CEOs of the companies in which our clients are invested, my entire focus was on stewardship and ensuring engagement that centers on creating long-term value for our clients. We set out to build the best global stewardship team in the industry – to engage with companies on corporate governance not just during proxy season, but year-round because we didn’t think that the industry’s reliance on just a few proxy advisors was appropriate. We believed that our clients expected us to make independent and well-informed decisions about what was in their best financial interest. And we still do.

Making these decisions requires understanding how companies are responding to evolving risks and opportunities. Changes in globalization, supply chains, geopolitics, inflation, monetary and fiscal policy, and climate all can impact a company’s ability to deliver durable value. Our stewardship team works to promote better investment performance for our clients, the asset owners. The team does that by understanding how a company is responding to these factors where financially material to the company’s business, and by advocating for sound governance and business practices. For many of our clients who have entrusted us with this important responsibility, BlackRock’s stewardship efforts are core to what they are seeking from us.

At the same time, we believe that adding more voices to corporate governance can further strengthen shareholder democracy.

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

On Wall Street and in the private sector

Critics blame ESG for Silicon Valley Bank failure

California regulators shut down Silicon Valley Bank (SVB) on March 10, making it the second-largest bank failure in American history. In the wake of the collapse and the fear of contagion, some in politics and the media have criticized the bank’s loans to ESG-related companies and its in-house ESG policies. For example, Congressman James Comer (R-Ky.), the chairman of the House Oversight Committee, said SVB was “one of the most woke banks” in America:

GOP Rep. James Comer, the chairman of the House Oversight Committee, slammed Silicon Valley Bank, or SVB, as “one of the most woke banks” in the US.

“We see now coming out they were one of the most woke banks in their quest for the ESG-type policy and investing,” Comer said, referring to environmental, social, and governance policies.

“This could be a trend and there are consequences for bad Democrat policy,” the Kentucky congressman continued on Sunday’s episode of Fox News’ “Sunday Morning Futures.”

Comer did not explain which environmental sustainability-linked investments would have caused SVB’s failure, or how they would have done so.

The New York Post ran a piece on March 11 detailing some of the ESG programs in which the bank participated:

A head of risk management at Silicon Valley Bank spent considerable time spearheading multiple “woke” LGBTQ+ programs, including a “safe space” for coming-out stories, as the firm raced toward collapse.

Jay Ersapah, the boss of financial risk management at SVB’s UK branch, launched initiatives such as the company’s first month-long Pride campaign and a new blog emphasizing mental health awareness for LGBTQ+ youth.

“The phrase ‘You can’t be what you can’t see’ resonates with me,’” Ersapah was quoted as saying on the company website. …

In addition to instituting SVB’s first “safe space catch-up” — which encouraged employees to share their coming-out stories — and serving on LGBTQ+ panels around the world, Ersapah spent time over the last year serving as a director for diversity role models and volunteering as a mentor for migrant leaders. …

On Saturday, Home Depot co-founder Bernie Marcus insinuated that “woke” policies like the ones launched by Ersapah could have led to SVB’s dramatic failure. …

“These banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is, shareholder returns,” Marcus said.

“Instead of protecting the shareholders and their employees, they are more concerned about the social policies. And I think it’s probably a badly run bank.

“They’ve been there for a lot of years. It’s pathetic that so many people lost money that won’t get it back.”

Strive Asset Management CIO questions the role of ESG in SVB’s failure

Matt Cole, the chief investment officer and global head of fixed income at the post-ESG investment firm Strive Asset Management, pushed back against those who blamed ESG for SVB’s collapse. Cole wrote that “[t]here probably isn’t an investor with a more defined bearish view on the cost of Stakeholder Capitalism/ESG on equity returns than myself,” but he questioned the claims that ESG caused the bank’s failure:

The SVB failure had about as much to do with ESG/Stakeholder Capitalism as ESG/Stakeholder Capitalism has to do with making money – nothing….

SVB was caught up in the ESG game, but were about average with respect to the banking sector as a whole based on ESG ratings. The too big to fail banks are all significantly worse with respects to ESG. SVB stood out in taking stupid investment risks, period.

Companies that support ESG underperform, according to WSJ op-ed

The Wall Street Journal ran an op-ed by Mike Edelson and Andy Puzder on March 10 arguing that “corporations that remain neutral on social and political issues outperform companies that lean left.” The two argued the following:

Woke capitalism makes its way into financial markets through an ill-defined concept known as environmental, social and governance investing. Huge investment managers use their ownership of shares to pressure companies to jump on the ESG train. But while individual investors are free to support whatever causes they wish with their dollars, those who invest other peoples’ money have a fiduciary duty to focus solely on clients’ financial interests. Thus it’s important to know whether politically focused companies actually do produce superior financial results.

To answer this question, we used research from 2ndVote Analytics Inc., a company that scores U.S. large-cap and midcap companies on their social and political engagement on five-point scale. Analytics evaluates company data on six social/political issues—the environment, education, abortion, Second Amendment rights, other basic constitutional freedoms and support for a safe civil society—and also generates a composite score. Company scores, updated quarterly, range from 1 (most liberal) to 5 (most conservative), with 3 meaning neutral or unengaged.

On average, roughly a quarter (or 221) of the S&P 900 large/mid-cap companies studied scored 3—taking no political or social stance on any of these six issues—during the period from June 30, 2021 (when the data was first available), through Jan. 31, 2023. Of the remaining companies, the political tilt was strongly to the left. More than 59% scored liberal, and under 15% conservative (with only one company higher than 4).

We used a neutral score of 3 as a proxy for companies that focus on investors’ returns rather than activism. We then compared the performance of those neutral companies with the market (represented by the S&P 500 and Russell 1000) as well as major ESG-registered funds. The point is to demonstrate how well a portfolio of business-focused politically neutral companies performs compared with those potentially distracted by political issues.

In making this comparison, we used a third-party index-calculation agent and market-value weighting in a manner similar to the S&P 500 and Russell 1000 benchmarks (total returns). The ESG products’ returns include the effect of fees; the neutral-universe and benchmark indexes don’t. The analysis covers the full period for which company scores were available, including the market runup in the last half of 2021, the 2022 bear market and the early-2023 rebound.

The results are compelling. The market was down overall, by 1.8% for the S&P 500 and 3.2% for the Russell 1000. ESG funds performed worse, with most losing 2.5% to 6.3%. A simple index composed of only neutral companies gained 2.9%, significantly outperforming both broad-market and ESG indexes in up and down markets. Notably, the benchmarks include the outperforming neutral companies—indicating that the politically active companies further underperformed. …

For a longer view, we compared the performance of the more than 200 companies that remained neutral over our data period with the benchmarks over the past 10 years. The neutral portfolio’s cumulative return (334%) outgained the market (230%); the results were substantially more compelling using equal-weighted returns as an alternative method.

One interesting result is the point at which performance notably begins deviating—2017-18, around the time companies (and perhaps their profits and returns) began feeling pressure from the power and influence of supposedly passive asset managers such as BlackRock, State Street and Vanguard, as those behemoths’ push into ESG intensified.

In the states

Harvard Law summarizes the last year of state-level ESG engagement 

The Harvard Law School Forum on Corporate Governance published a summary article on March 11 detailing the rise in state-level support for and opposition against ESG over the last year:

When it comes to ESG in the United States, among the most dramatic developments is an ideological battle unfolding at the state level, pitting liberal-leaning state governments that have embraced ESG-focused investing against conservative-led states that would seek to exclude it. …

[O] the past year, the picture has shifted. States have stepped up their lawmaking, defining the future of the ESG-related regulatory environment with widely divergent approaches.

These measures focus primarily on the investment of state-level public retirement system assets. New varietals of these and other ESG-focused laws are becoming regular events. Individually and collectively, the developments are further fracturing an already complicated landscape for financial services companies, including private investment managers that invest money on behalf of state pensions. Meanwhile multistate initiatives are taking aim at individual asset managers, banks and proxy advisory services perceived to be driving ESG growth.  In at least one state, banks are fighting back.

Much attention has focused on so-called “anti-ESG measures”—those prohibiting the consideration of ESG factors when investing state retirement funds or targeting companies that “boycott” industries such as fossil fuel or firearms companies—and the organizations behind them. A smaller but significant number of “pro-ESG” measures seek different outcomes and are gaining traction.  Other measures perhaps best described as “ESG-neutral” have led to or appear to be leading to pro- or anti-ESG legislative outcomes. …

More extreme measures on both sides, anti- and pro-ESG, have prompted some observers to sound the alarm that the United States may be straying from the fundamental purpose of ESG factors—as a valuation metric to gauge corporate success.

Whether, how long and to what extent the shift in ESG regulatory power remains with the states is yet to be seen. For now, in the United States, the term “ESG” is remarkable in its political divide.

Around the world

Sweden requires ESG investing for pension funds

Bloomberg reported on March 13 that Sweden is allocating over one-tenth of its pension funds to ESG investments:

Sweden is inviting international asset managers to help allocate 1 trillion kronor ($90 billion) of pension savings, but says it won’t accept applications from firms that don’t incorporate ESG into their strategies.

The new framework will replace a system tainted by an embezzlement scandal that infuriated Swedish taxpayers and triggered calls for a more robust setup. The upshot is that only investment firms that integrate environmental, social and governance goals into their work need apply, according to the Office of the Swedish Fund Selection Agency, which is overseeing the process.

“Unlike in the current system, there will be a requirement that the manager systematically integrates sustainability aspects into its operations,” Erik Fransson, executive director of the office, said in an interview. 

The move underscores the wildly divergent approaches different jurisdictions are taking as they figure out how big a role ESG should play in mainstream investing. In Europe, ESG is currently being hardwired into financial regulations. In the US, lawmakers just voted to block the pension industry from taking ESG risks into account. …

Sweden is now enshrining its ESG requirements for pension managers into law, under which investment firms must show an “exemplary approach to sustainability through responsible investment and responsible ownership.”

International investment firms interested in applying for the pool of pension savings, which represents just over 10% of Sweden’s total public retirement assets, need to be able to document their ESG claims. That includes showing they have processes in place to prevent portfolio funds being linked to violations of the United Nations’ Global Compact, the OECD’s guidelines for multinational corporations, or the UN’s guiding principles for human rights, according to a draft provided by the Office of the Swedish Fund Selection Agency.

And firms will only be allowed to offer investment products that are registered as ESG fund classes under Europe’s Sustainable Finance Disclosure Regulation, namely Articles 8 and 9, the draft shows. The first selection process is set to take place in the second quarter, and Sweden expects to choose a total of 150 funds.

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.

Congress rejects ESG in retirement plans

The House of Representatives voted on February 28 to pass a Congressional Review Act (CRA) resolution to rescind the Biden Labor Department rule permitting the use of ESG investing in ERISA-governed retirement plans. Republicans then used their temporary majority and the support of two Democrats to pass the bill in the Senate on March 1:

A Republican bill to prevent pension fund managers from basing investment decisions on factors like climate change cleared Congress on Wednesday, setting up a confrontation with President Joe Biden, who is expected to veto the measure.

The U.S. Senate voted 50-46 to adopt a resolution to overturn a Labor Department rule making it easier for fund managers to consider environmental, social and corporate governance, or ESG, issues for investments and shareholder rights decisions, such as through proxy voting.

The outcome highlighted Republicans’ willingness to oppose their traditional allies in Wall Street and corporate America that adopt what party lawmakers characterize as “woke”, liberal practices.

Two Democratic senators, Joe Manchin and Jon Tester, voted with Republicans. Both face reelection in Republican-leaning states in 2024. The Republican-controlled House of Representatives passed the bill on Tuesday. …

Republicans claim the rule, which covers plans that collectively invest $12 trillion on behalf of 150 million Americans, would politicize investing by allowing plan managers to pursue liberal causes, which they say would hurt performance.

Biden promises to veto resolution, maintain ESG rule

President Biden promised to veto the CRA resolution, which will mark the first veto of his presidency. The Wall Street Journal Editorial Board called the veto announcement revealing:

The Biden rule reversed a Trump-era clarification of the 1974 Employee Retirement Income Security Act (Erisa), which required retirement plan fiduciaries to consider solely “pecuniary” factors that have a “material effect” on investment risk or return. Erisa is intended to prevent retirement funds from using savings for their own purposes.

The Biden rule protects fiduciaries from lawsuits for considering ESG factors that could be “relevant” to investment performance such as a company’s greenhouse-gas emissions or workforce diversity. This broad standard would essentially let managers invest retirement savings however they want.

The rule would also augment the power of proxy advisory duopolists Glass Lewis and Institutional Shareholder Services (ISS) by directing fiduciaries to “rely on efficient structures” such as “proxy advisors/managers that act on behalf of large aggregates of investors.” ISS and Glass Lewis are voting force multipliers on ESG shareholder resolutions. The rule would drive more savings into ESG funds that typically charge higher fees by letting retirement sponsors offer them as default options in 401(k) plans. Workers can opt out of default plans but usually don’t. Why isn’t Mr. Biden lambasting ESG funds for charging “junk fees”? …

Mr. Biden claimed in a veto threat that returning to the Trump rule “would be interfering with the market,” supposedly because asset managers want free rein to consider ESG factors. Sorry, what’s good for BlackRock isn’t always good for workers, and protecting retirement savings isn’t interfering in markets.

Senator Cruz explains the Senate’s pushback against the Labor Department rule

After the Senate vote on March 1, Texas Republican Ted Cruz went on Fox News to explain why he and 49 other senators opposed the Labor Department rule and why he believes ESG poses a threat to retirement savings and capital markets:

Sen. Ted Cruz, R-Texas, joined “Varney & Co” on Thursday to discuss what impact the Biden administration’s “politicization” efforts could have on Americans’ investments. 

“This is your retirement that Joe Biden has said his politics matters more than your retirement, and he’s perfectly happy for you to take the hit,” Cruz said. 

GOP senators discussed the legislation during a press conference Wednesday, saying the Biden administration’s move with the ESG rule had “a certain irony,” given the administration’s rhetoric of working for the American public. 

“And there’s a certain irony here, since [the Biden administration] always billed themselves as actually caring about the person who’s struggling. People are going to struggle more because of this rule,” Sen. Bill Cassidy, R-La., said during the press conference.

“This weaponizes their retirement accounts against both their future, but also their present,” he continued.

Cruz said Thursday that the ramifications on Americans’ investment accounts would be detrimental, putting politics over helping Americans.

“‘Global ESG funds have underperformed the broader market in the past five years, returning an average of 6.3% a year, compared with 8.9% for broader funds, which means an investor who put $10,000 into an average global ESG fund in 2017 would have $13,573 today, roughly $1,720 less than if they’d put it into a non-ESG portfolio,'” Cruz said, quoting an article from Bloomberg. …

“The Senate stood together with a bipartisan vote yesterday and reversed this and said you ought to be able to save for your retirement without politicians impacting and hurting your savings,” Cruz said. 

Cruz claimed that the proposed ESG rule highlights a larger trend of politicization within the Biden administration, specifically the politicization of the Justice Department.

CNBC blames wealthy conservative donors for the pushback against ESG

CNBC published a piece on March 1 arguing that wealthy GOP donors were responsible for driving the federal and state pushback against ESG investing:

More than a half dozen conservative groups have helped to drive the criticism of Wall Street’s ESG investing methods — and some have little-known ties to longtime conservative donors or lawyers who have aided Trump himself.

Members of the State Financial Officers Foundations are all powerful state Republican officials, many of whom have scrutinized ESG practices or pulled back billions of dollars from investing firms. They include Oaks, who last year announced he would move $100 million in state funds from BlackRock to other money managers, and Florida’s GOP Chief Financial Officer Jimmy Patronis, who in December said the state treasury would pull out $2 billion in assets previously managed by BlackRock.

A representative for the State Financial Officers Foundation did not return a request for comment.

Behind the scenes, a larger network of conservative interest groups is helping to fund the organization’s events or send representatives to attend.

Conservative leaning groups including the 1792 Exchange, the Heritage Foundation, Consumers’ Research, American Legislative Exchange Council and Mercatus Center, were among the attendees of the private February meeting of the State Financial Officers Foundation in New Orleans, according to the attendee list reviewed by CNBC.

Some of those organizations participated in a similar State Financial Officers Foundation gathering in Washington D.C. in November 2022, according to an agenda. The meeting in D.C. focused, in part, on pushing back on ESG investment standards. The foundation announced at the time a targeted ESG campaign that features a website and an initial six-figure digital marketing effort. …

A growing list of Republican donors, including other Trump allies, along with a massive donor advisory fund have helped to provide funding for the anti-ESG fight. …

Marble Freedom Trust is led by former Trump judicial advisor Leonard Leo, who helped to coordinate campaigns to confirm the former president’s Supreme Court nominees. The group received a $1.6 billion donation in 2021 from Barre Seid, an electronics manufacturing mogul, according to The New York Times.

In the states

Idaho House votes three times against ESG

The Idaho House of Representatives passed three bills on March 2 intended to restrict the use of ESG investments:

House lawmakers Thursday gave the green light to a trio of bills allowing the state to boycott businesses and financial institutions which follow environmental, social and governance standards, known as ESG.

The standards are guidelines that companies adopt for the way they conduct themselves, or who they choose to do business with. In the financial sector, the standards can guide decisions on where investments may or may not be made.

The bills sailed through on a wide margin, with Democrats and a handful of Republicans voting no on each. Rep. Barbara Ehardt (R-Idaho Falls) sponsored two and fought back against arguments that the legislation allows the state to pick winners and losers.

“We are not telling businesses how to run their business,” she said on the house floor. “There’s nothing remotely in here that says that, that would be a misdirection, a false narrative.”

Nationwide, Republicans have attacked these standards as ‘woke ideology.’ Ehardt says the state needs to protect its industries targeted by ESG reforms. …

The three bills now head to the Senate.

On Wall Street and in the private sector

Journalist alleges continued anti-Israel bias at Morningstar/Sustainalytics

The Washington Free Beacon published an article by senior writer Adam Kredo last month arguing that the financial company Morningstar is not living up to a promise it made to purge anti-Israel bias from its Sustainalytics ESG ratings service. Morningstar has been under increasing pressure from state attorneys general regarding this matter:

The financial ratings giant Morningstar has failed to follow through on promises to eradicate anti-Israel bias from its corporate ratings system and is still blacklisting companies that work with Israel.

Morningstar subsidiary Sustainalytics—which rates companies based on Environmental, Social, and Corporate (ESG) governance guidelines—placed at least two companies on its investment watchlist for their work with Israel’s security sector: Motorola Solutions and Elbit Systems, both of which provide counterterrorism surveillance technology that helps the Jewish state combat terrorism, an issue that is taking on renewed importance as Israel faces a new wave of Palestinian violence.

Sustainalytics has faced accusations that it promotes the anti-Semitic Boycott, Divestment, and Sanctions (BDS) movement, which wages economic warfare on Israel, by downgrading companies that work with Israel. Media attention on the issue, including a series of reports by the Washington Free Beacon, forced Morningstar to announce a sweeping number of reforms that it claimed would combat anti-Israel bias. But several months after this announcement, Middle East experts and former U.S. officials are concerned that Sustainalytics is penalizing companies for the work they do to prevent terrorism in Israel. Sustainalytics’s ratings serve as a guide to investors concerned about social issues, and any company placed on its watchlist can suffer as a result….

While Morningstar said last year that it initiated a company-wide process to eradicate anti-Israel bias, Motorola Solutions and Elbit Systems remain on the watchlist for their work with Israel’s security sector, according to an analysis reviewed by the Free Beacon that summarized Morningstar and Sustainalystics’s updated ratings….

“Morningstar says Motorola has a human rights problem because its technology is used to track Palestinian movements. What the company leaves out is that the technology is tracking the movement of Palestinian terrorists attempting to infiltrate Jewish areas, like the terrorists who murdered the Fogel family back in 2011,” said Richard Goldberg, a former White House National Security Council official who serves as a senior adviser at the Foundation for Defense of Democracies think tank. “Morningstar’s position is that Motorola should withdraw its operations and let terrorists stab more Jewish children to death.”

Goldberg, who was one of the first analysts to expose alleged anti-Israel bias at the company, said Sustainalytics continues to bolster the BDS movement as it tries to penalize companies for working alongside Israel. A Morningstar spokeswoman would not answer Free Beacon questions about why these two companies remain flagged.