How is the “anti-ESG movement” impacting ESG investing?

Supporters of a relatively new anti-ESG “movement” hope to limit the ability of investors to factor environmental, social, and governance (ESG) considerations into their investment decisions. 

Republican lawmakers have been active in an anti-ESG campaign, which claims: 

• Asset managers using ESG impose a “woke” political agenda on investors by excluding certain industries and sectors.

• Investors should not consider ESG factors in investment decisions and instead focus on financial considerations as the primary investment lens. 

Yet, factoring ESG considerations into investment decisions has already become mainstream. Roughly 50-85% of investors are interested in sustainability information. Assets under management totalling $35.5 trillion take ESG factors into account. Mandates for ESG reporting are growing worldwide. 

Investors have diverse motivations for embedding ESG considerations into their investment decisions: risk reduction, improving societal benefits and operational efficiency are a few examples. 

Republican lawmakers have enacted or proposed two main types of “anti-ESG legislation” in Republican-led states since 2021. These either require state-led investments to ban local authorities’ ESG investment or end business relationships with banks or other financial institutions that boycott certain industries.  

For example, Texas passed the first-ever anti-ESG bill on June 14, 2021, which has an anti-boycott format. It bars state authorities from banking with financial institutions that have divested from fossil-fuel energy assets in Texas. Florida passed an ESG investment ban in its State Board of Administration Resolution on August 23, 2022 requiring the state not to include “pecuniary factors” such as ESG considerations into investment decisions other than for maximizing investment returns.

Research from the nonprofits the Sunrise Project, As You Sow and Ceres suggests that in states where anti-ESG laws are passed, taxpayers will have to pay an additional interest payments of roughly $445 million per year on average. 

In addition to these cost concerns related to anti-ESG bills, the Montana Bankers Association and the Kentucky Bankers Association have pushed back against legislation proposed in their respective states. In Montana, bankers asked lawmakers to substitute an  anti-ESG bill with a non-binding resolution, while bankers in Kentucky defended their ESG considerations following a probe into banks’ activities. 

Additional activities from the broader anti-ESG campaign include: 

• Republican lawmakers recently blocked a Labor Department rule which allows investment plan advisers to consider ESG factors as part of fiduciary responsibility. President Joe Biden is expected to veto their decision. 
• The creation of a themed ETF called Strive which amassed hundreds of millions of dollars from investors who choose to ignore ESG factors. 
• A total of 43 conservative “anti-ESG” shareholder resolutions filed by Fox News commentator Steven Milloy and ​​the National Center for Public Policy Research, which passed at a rate of 7%, compared to an average of 30% for all other shareholder resolutions. 
• A targeted backlash against BlackRock’s CEO Larry Fink over his support for climate change action.
• Threat of an antitrust lawsuit causing Glasgow Financial Alliance for Net Zero (GFANZ) to leave the Race to Net Zero and soften its approach to fossil fuel divestment. 

At first glance, it appears the anti-ESG campaign as a whole has mimicked the ways ESG advocates have built momentum: themed ETFs, proxy voting, public shaming of CEOs, divestment from ESG funds and regulations. In other words, defenders of anti-ESG have situated themselves as a side in a debate. Witold Henisz of Wharton’s Environmental, Social and Governance (ESG) Initiative says this creates a “false equivalence” between an established movement and a so-called counter-movement. 

While investors’ interest in ESG has grown significantly over the past twenty years, ESG is hardly a one-size-fits-all approach. Not only does ESG include a wide range of criteria, which investors can weigh differently, ESG investing encompasses a broad range of investment strategies. 

Appealing to investors, however, may not be the point of the anti-ESG campaign. It appears more intent on polarizing public opinion. The so-called debate didn’t even exist prior to 2021 for the majority of investors or the public. This raises the question: whose interests do the lawmakers’ campaigns serve? 

The investigative journalism and watchdog group Documented has published research which shows a public relations firm, CRC Advisors, holds weekly Zoom meetings with Treasurers from a network of “red states.” CRC advisors is chaired by the conservative legal nonprofit, the Federalist Society’s co-chair Leanord Leo. The Zoom calls are sometimes attended by the American Petroleum Institute (API) and the American Legislative Exchange Council (ALEC), both known for their fossil fuel industry advocacy. 

If the public does start to take an anti-ESG side in this “debate,” it would conflict with existing public opinion on climate change mitigation. Nature research shows 66-80% of the US public supports climate mitigation policies. 

If effective, the state-led movement could stall the SEC’s pending rules on ESG and Climate Risk. ESG regulations are designed to codify and refine ESG reporting practices, to help investors identify and reduce ESG-related material risks. 

In sum, if an anti-ESG lens becomes more successful, it could have the following outcomes: 

• Limiting the availability and quality of ESG investment data available to investors. 
• Creating dual opposing regimes that international companies have to adhere to (ESG data collection for Europe, the UK and blue states versus ESG factor omission for red states). 
• Requiring state pension funds to invest in fossil fuel assets, which are exposed to significant stranding, litigation and reputational risks due to climate change. 

Ultimately, ESG debates shouldn’t center on whether ESG is valid, but how to improve the underlying data. This gives investors a stronger ability to draw correlations between ESG risks and financial performance. This is why we take a NoScore ESG approach to our platform, where we remove complex ESG ratings and give Advisors the underlying data behind companies, funds, and ETFs across metrics their clients care about.