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September 16, 2022

US state treasurers push back on anti-ESG legislation

PITTSBURGH, PA – AUGUST 19: Florida Gov. Ron DeSantis speaks at the Unite and Win Rally in support of Pennsylvania Republican gubernatorial candidate Doug Mastriano at the Wyndham Hotel on August 19, 2022 in Pittsburgh, Pennsylvania. During his visit to the state, DeSantis urged Republican voters to stand behind Doug Mastriano. (Photo by Jeff Swensen/Getty Images)
PITTSBURGH, PA – AUGUST 19: Florida Gov. Ron DeSantis speaks at the Unite and Win Rally in support of Pennsylvania Republican gubernatorial candidate Doug Mastriano at the Wyndham Hotel on August 19, 2022 in Pittsburgh, Pennsylvania. During his visit to the state, DeSantis urged Republican voters to stand behind Doug Mastriano. (Photo by Jeff Swensen/Getty Images)

ESG policies are in the Republican’s firing line but the fightback is beginning.

Treasurers in 14 US states signed a letter insisting that, over the longer term, forcing investors to ignore the reality of climate change and the economic transition will harm everyone, financial institutions and taxpayers alike.

At least 17 US states now boast policies or laws demanding a boycott on banks and financial institutions because of their ESG policies. This month, Florida banned state pension funds from screening for ESG risks. Requiring investors to consider environmental and social factors is “an attempt to impose, through the economy, an ideological agenda that could not win at the ballot box,” according to governor Ron DeSantis (pictured), who hopes to stand for president in 2024.

Pushback

On Wednesday, 13 state treasurers and New York City’s chief financial officer signed a letter lambasting this line of thought. The blacklisting by certain states of “financial firms that don’t agree with their political views” will “reduce competition, restrict access to many high quality managers” and leave taxpayers to pick up the bill, they wrote.

“The blacklisting states apparently believe, despite ample evidence and scientific consensus to the contrary, that poor working conditions, unfair compensation, discrimination and harassment, and even poor governance practices do not represent material threats to the companies in which they invest,” stated the treasurers. “They refuse to acknowledge, in the face of sweltering heat, floods, tornadoes, snowstorms and other extreme weather, that climate change is real and is a true business threat.”

The “evolving divide” will lead to two kinds of states, said the letter, those focused on short-term gains and those focused on “long-term beneficial outcomes for all stakeholders”. States concentrated solely on preserving the status quo “will fail to compete over the longer time horizon that is necessary for them and their pension funds to succeed”. The signatories also warned that failing to introduce “more rigorous oversight” could leave financial institutions liable to “possible suits” or legal challenges.

Means to an end

ESG is “the most effective tool we have to allow investors to consider the full range of issues affecting their portfolio,” says Gregory Hershman, the head of US policy at the Principles for Responsible Investment, a UN-backed initiative. Examining the wider world is “a core part of investors’ fiduciary duty and allows them to deliver long-term, risk-adjusted returns for beneficiaries”. ESG delivers transparency and “is means to an end, not, as some have suggested, a politically-motivated end in itself”.

Anti-ESG policies are “counter to fundamental free market principles,” says Hershman, and “tantamount to censure on those investors which are becoming better informed about the economic transition”.

Indeed, however much politicians pushback against ESG, they cannot change reality. “There is politics and there is the underlying science that shows the physical and transition risks the US is facing in the transition to net zero,” comments Nina Seega, the sustainable finance research director at the Cambridge Institute for Sustainability Leadership. She underlines the irony of the ESG backlash in Florida given the challenges the state faces from flooding and rising sea levels.

Yet, even if the anti-ESG push fails to spread more widely, efforts, such as these by Republicans to muddy the waters on climate change seem to be having an impact.  Americans asked to estimate the percentage of support for climate change mitigation policies guessed 37–43 per cent, shows a study published in Nature at the end of August. The actual number is 66–80 per cent.

 

A service from the Financial Times