ESG investing has become woven into the fabric of major investing firms—creating disagreements between those who say it’s needed to enact change and those who say it infringes on the free-market mechanics of investing.
Key Details
- Environmental, Social, and Governance metrics (ESG) are a financial shorthand for a company’s approach to environmental impact, social issues, and transparency and describe how companies approach investment strategies.
- ESG has become a significant issue for those following BlackRock CEO Larry Fink’s letter calling for more corporate social responsibility from “stakeholder capitalists.”
- Republican politicians, including governors and U.S. senators, have begun targeting ESG-compliant asset managers such as BlackRock, Vanguard, and States Street for “woke” environmental policies, criticizing them for using taxpayer money to advance ESG standards.
- ESG defenders believe the policies do not go far enough in using investing to address climate change.
Why it’s News
A major discussion point regarding the global economy is climate change. Governments around the world have made major commitments to achieving net-zero emissions by 2050—including bans on carbon-burning vehicles, converting planes and trains to alternative fuels, and subsidizing clean-energy sources like nuclear energy.
“Investors—and the public—are demanding more transparency, disclosures, and socially responsible leadership from companies. That’s why the U.S. Securities and Exchange Commission (SEC) is finalizing its climate risk disclosure rules, and why the European Union issued its benchmarks and disclosures,” says Forbes.
Republicans, meanwhile, argue that infusing investment strategies with ESG constraints only increases risk and decreases reward. To that end, Republicans are eager to stall or reverse President Joe Biden’s agenda. The GOP’s midterm victory in the House of Representatives means climate legislation will have to be passed in a bipartisan fashion or not at all. ESG standards have become a front in the culture wars.
Backing up a Bit
Florida Governor Ron DeSantis recently announced that the state would pull $2 billion in assets from BlackRock, one of the largest investment companies in the world, in response to the company’s ESG policies, claiming that the company was using taxpayer money to further a political agenda. The decision divests BlackRock as an asset manager over the state’s pension plan and 25 other funds.
The announcement came after 13 GOP-controlled states began pushing against ESG standards at Vanguard Group for its support of environmental policies. At least 15 GOP-controlled states are planning to divest from ESG-focused companies in the next year and Republican members of the House of Representatives are currently preparing anti-trust legislation against asset management companies.
“Texas was the first state to ban BlackRock from doing business with our state. I signed a law in 2021 to ban financial companies that have ESG policies that discriminate against the oil and gas sector. That includes BlackRock and several other financial companies,” says Texas Governor Greg Abbott.
Florida CFO Jimmy Patronis and State Representative Bob Rommel further explained on Wednesday that the state is going to file legislation next year that penalizes companies for not prioritizing financial returns over ESG concerns.
BlackRock has responded to Republican criticism saying, “The conclusions are built on flawed premises and risk harming millions of everyday investors that rely on mutual funds and exchange-traded funds to help them retire with dignity.”
Anti-ESG Viewpoint
National Review editor and Bloomberg columnist Ramesh Ponnuru says that investors are being told to take high-risk, low-reward investments in companies with high ESG scores at the cost of their own profitability. “The whole concept of ESG investing can be amorphous. And for good reasons and bad, Republicans are reluctant to have the government interfere in the workings of capital markets,” he says.
The concern isn’t without merit. Bloomberg reports that the 10 largest ESG funds all saw double-digit losses in 2022 as the financial system faced repeated stressors and recession fears. Vanguard’s ESG U.S. Stock decreased by 20.6% and Blackrock’s iShare’s ESGA decreased by 16.9%. ESG funds are just as vulnerable as other funds and suffered worse than the S&P 500 Index’s 14.8% decline.
The greater concern for Republicans is that ESG is being used as a tool to spread greater Democratic influence. As we previously reported, SpaceX and Tesla CEO Elon Musk is a critic of ESG standards, stating that it is being used to pressure corporations and weaponize “social justice.”
Tesla previously criticized ESG standards in its 2021 Impact Report, stating that current methodologies are flawed and don’t address real-world impact. Tesla, one of the leading electric vehicle manufacturers in the world, was taken off the S&P500 list for insufficient ESG compliance earlier this year.
Pro-ESG Viewpoint
Proponents of ESG point to Governor DeSantis’s announcement as a cynical political ploy—risking the state’s pension fund to help further position him as a potential 2024 presidential candidate.
BlackRock defends its comprehensive approach to ESG by pointing out that climate risks are also investment risks, and that approaching investment with climate considerations in mind helps investors plan long-term changes.
“We believe that society is on the cusp of transformational change toward sustainability. Companies, investors, and governments must prepare for a significant reallocation of capital. BlackRock’s sustainability strategy focuses on two structural themes driving this change: transition finance and stakeholder capitalism,” says BlackRock.
ESG policies are not strict regulations or rules, and often reflect a company’s commitment to transparency rather than incentivizing direct action. This has drawn criticism from climate-change proponents who believe corporations play a major role in contributing to carbon emissions and need to make great commitments to change. As critics see it, attempting to appeal to ESG policies is just “greenwashing” the true impact corporations have.
“The funding in ESG is dedicated to assuring returns for shareholders, not delivering positive planetary impact. Many environmentalists think ESG is a distraction from the main issue they’d like to see traction on: companies disclosing the impact their products and investments have on the world around them, and accounting for that in decisions,” says Vox Media.
