Republicans in state capitals across the country are targeting an investment concept known as environmental, social and corporate governance criteria, or ESG for short.
Describing these investment criteria as “wake up” and “misguided activism, GOP officials say that by considering these factors when making investment choices, financial institutions are putting ideology ahead of making money. Experts on these investment criteria say it’s the other way around, and Republicans are losing money for their constituents by unnecessarily narrowing the options of financial institutions the state does business with.
Nineteen Republican state attorneys general, led by Arizona AG Mark Brnovich, wrote a letter in August to BlackRock, the largest asset manager in the world, which manages 10 trillion dollars, according Initiated. The letter accuses BlackRock of making decisions based on its alleged political agenda rather than the welfare of state pensions.
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“A governance engagement strategy primarily focused on BlackRock’s climate program necessarily overlays ESG factors on the core index portfolios that make up a substantial part of many state pension funds,” prosecutors said. Generals of the States in their letter. They added: “BlackRock’s commitment to the financial performance of state pensions should be undivided.”
The state attorneys general of Arkansas, Georgia, Idaho, Indiana, Kansas, Louisiana, Missouri, Montana, Nebraska and Ohio were among those who have signed the August 4 letter.
In his answerBlackRock called the attorneys general’s statements inaccurate and wrote “we are troubled by the emerging trend of policy initiatives that sacrifice pension plans’ access to high-quality investments – and thereby undermine the financial returns of retirees.
The same group of attorneys general as well as Virginia’s AG joined a investigation by the Missouri Attorney General to find out whether Morningstar, a financial services company, violated consumer protection law by evaluating companies’ performance on ESG issues.
Republican Florida Governor Ron DeSantis has also taken on the question. On August 23, he succeeded pushed through the ban on taking ESG criteria into account in the investments of public pension funds.
DeSantis said of his victory against ESG investing, “We reassert the authority of Republican governance over corporate dominance and prioritize the financial security of the people of Florida over fanciful notions of a utopian future.”
But Witold Henisz, associate dean and faculty director of the ESG initiative at the Wharton School at the University of Pennsylvania, said such policy developments are bad news for taxpayers in those states.
“When states say they can’t do business with financial institutions that consider climate risk and other ESG factors, it means they’re not doing business with the biggest and most sophisticated financial institutions. in the US and globally, which means they have to issue bonds and interact with smaller financial institutions that have less economies of scale and economies of scope and therefore charge higher fees “, did he declare.
According Deloitte, by 2024, half of all professionally managed assets globally will have investments in companies that consider ESG issues. BlackRock owns seven of the top 10 ESG funds, according to Barronsand its integrated ESG portfolios covered $2.9 trillion in assets, according to its 2020 Sustainability Information Report.
A 2021 investigation on responsible investing by Nuveen, an asset manager, found that 75% of employees either strongly agreed or somewhat agreed that employers who offer ESG and responsible investment options care about their results in retirement.
The Securities and Exchange Commission resource for investors notes that the environmental component of these investment strategies “could focus on a company’s impact on the environment or the risks and opportunities associated with the impacts of climate change on the company, its operations and its industry” . Social criteria can be about human rights issues or labor rights, and governance is about how the business behaves.
When states say they can’t do business with financial institutions that consider climate risk and other ESG factors, it means they’re not doing business with the biggest and most sophisticated financial institutions in the world. United States and globally, which means they have to issue bonds and interact with smaller financial institutions that have less economies of scale and economies of scope and therefore charge higher fees students.
Alison Taylor, executive director of Ethical Systems at New York University, said climate issues, which Republicans have been most critical of when discussing ESG investing, are actually one of the best factors to consider when making these investment decisions.
“Depending on the issue, there’s more or less of a ‘business case’, more or less of the evidence showing that this issue will affect the bottom line of the organization,” she said. “Now where everyone has landed is climate change. I think that’s problematic for the Republican position because there are some of these issues where there’s mixed evidence or there isn’t. There’s not a lot of evidence that the issue will have a dramatic impact on long-term outcomes, but climate is certainly an issue where there’s plenty of evidence that if you don’t manage climate risk now, it will have a financial impact. detrimental in the long term.
Politicians from North Carolina and Texas have also spoken out on ESG investing. Texas Controller Glenn Hegar (R) prohibited several financial companies to have contracts with its state, which means that Texas pension funds can no longer work with large companies like BlackRock, UBS Group AG and Credit Suisse Group AG. Hegar said he decided to focus on banning companies that “boycott energy companies” in his Aug. 24 announcement of the decision.
Hegar said state government entities should notify his office no later than 30 days after seeing the company ban list of the financial companies in which they hold stakes. They must also submit an annual report “to the Speaker of each House of the Legislature and to the Attorney General identifying all securities sold, redeemed, assigned, or withdrawn in accordance with the code of the Government of Texas.”
Texas has been targeting ESG investing for some time. Wayne Christian, a Republican on the Texas Railroad Commission, which regulates oil and gas, criticized ESG as potentially harmful to jobs in the energy sector in January 2021, according Bloomberg. In May 2021, he said the SEC should shield oil and gas companies from ESG investing, according to the outlet. reported. The following month, Texas Governor Greg Abbott (right) signed a bill stipulating that state pension funds must divest, sell, retire and buy back companies he calls a corporate boycott energy.
North Carolina State Treasurer Dale Folwell, who manages the state pension fund, also criticized ESG investing and Told top1000funds.com that the pension fund will take a different approach to environmental factors through shareholder voting rather than asset manager proxy voting.
“We don’t want our power of attorney used to promote policies that have nothing to do with our fiduciary responsibility; using those assets and voting those assets in a way contrary to our fiduciary responsibilities is no longer something we’re going to do,” said Folwell, who was criticized for his finances decisions in the past.
Taylor said she views Republican efforts to attack ESG investing as similar to the Republican focus on critical race theory in that policymakers took a concept that many Americans were unfamiliar with and used it to their advantage to achieve certain policy goals.
“You can think of ESG as an attempt to kind of bring critical race theory into the private sector,” she said.
Taylor added: “This stuff is wonky and it’s technical and it’s really contested and a lot of people use the term in different ways. It’s exploiting a level of misunderstanding and I think they’re hoping people will be like, ‘Well, Disney has really crossed the line.’