ESG Isn’t Going Away Anytime Soon

The battle between red states and Wall Street is just getting started.

Photo Credit: Getty

While the “Red Wave” never emerged in this November’s midterm elections, the issues that have riled up conservative voters the most in the past two years aren’t going away anytime soon. In fact, one such issue — politicized investing — is likely to continue growing in prominence. Fights over the grab bag of left-wing policy ideas better known as environment, social, and governance (ESG) theory will continue to be a flashpoint between Democrat policymakers (and their allies) and free-market advocates in next year’s legislative sessions at both the federal and state level.

Although there will be no change in control of the Senate, all the gavels in the House of Representatives are currently being handed from D to R hands. Now, slim control of one chamber with a president of the opposing party is no way to pass any meaningful legislation, but it does give combative committee chairmen with a long list of targets a green light for high-profile interrogations, setting up a series of oversight hearings that could put history’s greatest dramatists to shame. Expect committees such as Financial Services and Judiciary to bring everyone from Securities and Exchange Commission (SEC) chairman Gary Gensler to BlackRock CEO Larry Fink up to Capitol Hill for an uncomfortable series of questions about how boycotting oil and gas investment, diversity mandates, and support for abortion have become de rigueur in the world of corporate policymaking.

More importantly, of course, is how government policy is now being written to entrench the worst trends in private-sector ESG initiatives. No matter how stupid, as long as today’s trendy investing and lending strategies are subject to the consequences of the market, many investors are likely to realize the risk that ESG entails, and course correct in future years. That won’t be possible, however, if the SEC and other financial regulators stack the deck in favor of what they consider to be the ideologically correct position. The SEC, for example, is currently finalizing a new rule on disclosure of climate change-related information that would cost billions of dollars a year and create an entirely new industry of work for law firms, accountants, management consultants, and even engineering firms. Every one of those groups will soon have a big financial incentive to support the new rule and lobby for greater regulation in the future.

Last summer, the SEC also approved a new regulation for NASDAQ which requires any company listed on the exchange to conform to a board-diversity rule “designed to encourage a minimum board diversity objective for companies.” The rule will require listed firms to have at least two “diverse directors” on their board by 2025. Diversity is defined as directors who self-identify as female, as a member of an underrepresented minority group, or as LGBTQ+. There was, of course, no mention of any kind of ideological, political, religious, or career-background diversity; so all large public companies will still be free to have a rainbow spectrum of center-left technocrat corporatists representing shareholders for the foreseeable future. There is one silver lining, though: The Alliance for Fair Board Recruitment and the National Center for Public Policy Research are challenging the rule, and it is currently being litigated in the Fifth Circuit.

But the state level is likely to be the most active arena for ESG policy in the coming years. Indeed, over the past two years, the salience of politicized investing and ESG theory has rocketed up from almost nothing to a top concern, especially in Republican-majority legislatures. Texas passed a law in 2021 barring banks that boycott oil and gas from doing business with state agencies, and several state financial officials have challenged finance behemoth BlackRock, claiming that the firm’s announced climate policy is inconsistent with its fiduciary duty to maximize returns for consumers.

The issue here is very simple: Asset management firms such as BlackRock have accepted money from millions of individuals on the premise that they are attempting to produce the greatest returns. Instead, they’re using the influence of that capital to push the environmental and social goals that members of the firm’s senior management team happen to personally endorse. It’s bad enough that the firm is ignoring opportunities that could make people’s retirement more secure, but BlackRock goes beyond that, using its money and power to lobby for political goals that many of its investors strongly disagree with.

The pushback has already been significant. In January of this year, West Virginia treasurer Riley Moore removed some of his state’s funds from BlackRock’s management, saying that doing business with the firm ran contrary to his duty to “ensure that taxpayer dollars are managed in a responsible, financially sound fashion.” Moore singled out BlackRock’s anti-fossil fuel pronouncements, but also included their problematic enthusiasm for investment in the People’s Republic of China, with its questionable environmental, labor, and human-rights record. In July, Moore expanded the policy and announced that Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo, and BlackRock would all be barred from doing business with state entities entirely because of their rejection of investments related to coal, one of West Virginia’s most important commodities.

And the hits kept coming. In August of this year, 19 state attorneys general sent a letter to BlackRock CEO Fink warning him that “BlackRock’s actions on a variety of governance objectives may violate multiple state laws.” The letter is especially focused on the doublespeak that BlackRock and other financial companies have been attempting since the Texas anti-boycott law was enacted and the ESG backlash began. Firms that had previously made headlines for their bold pledges to destroy the fossil-fuel industry and advance the climate-activist agenda began claiming that they had no such objective. But the goals of groups such as the Glasgow Financial Alliance for Net Zero and Climate Action 100+, which these firms had endorsed, are on the record for all to see. Bank and asset management executives are now in the unenviable position of answering the question: “Were you lying then, or are you lying now?”

Expect more of this aggressive action in 2023. On Election Day last month, 50 state financial officer positions (treasurer, auditor, controller, etc.) were on the ballot. According to Ballotpedia, Republicans won 29 of those races and Democrats won 20, with one race still to be called. With groups such as the State Financial Officers Foundation working to promote resistance to creeping ESG mandates, state treasurers and similar officials are more important than ever. Come January, several red-state legislatures are expected to introduce bills that would follow in the footsteps of Texas and West Virginia or enact a requirement for the managers of state pension funds to invest only for the benefit of retirees rather than advancing unrelated policy goals. Model legislation from the American Legislative Exchange Council and Heritage Action for America gives a good sense of what these bills will look like.

Read the full article at National Review.