On Thursday, May 12, 2022 in Salt Lake City, the Utah State Capitol is seen behind an oil refinery. A growing number Republican-led States whose economies heavily rely upon fossil fuels are fighting back against changes in the financial industry to take into account new factors like environmental risk in their investment decisions. Associated Press photo taken by Rick Bowmer, St. George News| Associated Press photo by Rick Bowmer, St. George News
SALT LAKE CITY (AP). Republicans are coming out swinging against Wall Street’s growing efforts to consider factors like long-term environmental risk in investment decisions, the latest indication the GOP is willing to damage its relationship with big business to score culture war points.
Many are looking at ESG, which stands for environmental, social and governance. This is a sustainable investment trend that is sweeping financial markets. It is considered politically incorrect by red state officials who want to stop investors from contracting with states from adopting the concept at any level.
For right-wing activists who previously brought criticisms of critical race theory, diversity, equity and inclusion and social emotional learning to the forefront, it’s the latest acronym-based source of outrage to find a home at rallies, in conservative media and in legislatures.
ESG is still not mainstream political messaging. But, there is growing backlash against the concept. In a speech in Houston last week, Mike Pence, the former Vice President, attacked the concept. And on Wednesday, the same day he said on Twitter he planned to vote Republican, Elon Musk attacked it after Tesla lost its place on the S&P 500’s ESG Index. He called it a scam “weaponized by phony social justice warriors.”
Investors are required to consider factors such as pay equity, environmental risk, and transparency in accounting practices. They have adopted the principles in such a way that they now control $16.6 trillion of investments in the U.S., thanks to recent disclosure requirements and analysis by rating agencies.
Republicans, who are known for their support of fewer regulations, are trying to impose new rules on investors in many places. These efforts show how party members are prepared to distance themselves from big businesses in order to fight back against ideological foes.
“I don’t think we’re the party of big business anymore. We’re the party of people more specifically, we’re the party of working people,” West Virginia Treasurer Riley Moore said. “And the problem that we have is with big banks and corporations right now trying to dictate how we’re going to live our lives.”
ESG opponents criticize it as a politicized and costly diversion from pure financial investment principles. Advocates, however, say that the criteria is more accurate and accounts for risk and promises steady returns.
“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” Larry Fink, CEO of investment firm BlackRock and a leading proponent, told clients in a letter this year.
But Moore and others including Utah’s Republican state treasurer Marlo Oaks argue favoring green investment over fossil fuels denies key industries access to the financial system and capital. They have targeted S&P Global Ratings for appending ESG scores to their traditional state credit ratings. They fear that if they don’t make changes to their scores, borrowing for projects such as schools or roads could become more expensive.
In an April letter, Oaks demanded S&P retract analysis that rated Utah as “moderately negative” in terms of environmental risk due to “long-term challenges regarding water supply, which could remain a constraint for its economy … given pervasive drought conditions in the western U.S.”
The letter was co-signed by the governor, legislative leaders and the state’s congressional delegation, including Sen. Mitt Romney, whose former firm Bain Capital calls ESG factors “strategic, fact-based and diligence-driven.” It said ratings system “attempts to legitimize a dubious and unproven exercise” and attacks the “unreliability and inherently political nature of ESG factors in investment decisions.”
Oaks said that ESG was similar to critical race theory but that he was more concerned about capital markets and what he called attempts to manipulate them by fossil fuel opponents. He suggested that investors should choose businesses with high ESG scores.
“DEI, CRT, SEL. It can be hard to keep up with the acronyms,” he wrote on an economics blog last month, “but there’s a relatively new one you need to know: ESG.”
Oaks stated that investors who make carbon neutral or net zero criteria were, in essence, restricting capital access for oil and gas companies, hurting their returns, and possibly contributing to gas price spikes.
Officials from more than 12 red states reject the idea that the energy shift underway could make fossil fuel-related investment riskier over the long-term.. They claim that employing asset managers with a preference to green investments is a way for state funds to support agendas that are out of sync and against constituents.
Conservative groups, such as the American Legislative Exchange Council (ALEC) and the Heartland Institute (HII), back anti-green investment efforts in statehouses. They support bills that either divert state funds from financial institutions using ESG or prohibit them from using it for scoring individuals or businesses.
Texas, West Virginia, and Kentucky have passed laws requiring that state funds be limited to transactions with companies that avoid fossil fuels. Wyoming considered banning “social credit scores” that evaluate businesses using criteria that differ from accounting and other financial metrics, like ESG
After conservative talk show host Glenn Beck visited the Idaho Statehouse and referred to ESG as critical race theory “on steroids,” the Legislature passed a law in March prohibiting investment of state funds in companies that prioritize commitments to ESG over returns.
The American Legislative Exchange Council recently published a model policy that would subject banks managing state pensions to new regulations limiting investments driven by what it calls “social, political and ideological” goals.
Though the policy doesn’t mention it outright, Jonathan Williams, the group’s chief economist, said ESG’s mainstreaming amid broader trends of political correctness was a driving force. His research has shown that incorporating other financial metrics can lower the rate at which state pensions are underfunded.
Advocates for sustainable investing deny this charge and argue that responsible investing is possible when you consider the risks and realities of climate changes.
Arkansas and West Virginia have recently stopped receiving pension funds from BlackRock due to the asset manager adding smaller carbon footprint businesses to its portfolios. Moore, West Virginia’s treasurer, hopes more will follow.
Though it’s drawing enthusiasm, the green investment discourse differs from recurring debates over gender and sexuality or how history is taught. Both proponents and detractors acknowledged they’re surprised pensions, credit ratings and investment decisions have become campaign rally fodder.
Last month at the Utah state party’s convention, thousands of Republicans roared when Sen. Mike Lee described green investment in similar terms to critical race theory another acronym-based foil: “Between CRT and ESG and MSNBC, we get way too much B.S.,” Lee said.
Bryan McGannon is a lobbyist for US SIF. The Forum for Sustainable and Responsible Investment. He said that opponents were wrong in construing sustainable investing trends to be political. If states refuse to reckon with how the future will likely rely less on fossil fuels and limit how environmental risk can be considered, he said, they’re making decisions with incomplete information.
“If a state’s not considering those risks, it may be a signal to an investor that this might not be a wise government to be putting our money with,” McGannon said. “Investors use a huge swath of information, and ESG is a piece of that mosaic.”
Written by SAM METZ of The Associated Press. Stan Choe, New York, and Lindsay Whitehurst, Salt Lake City, were both AP writers who contributed to this report.
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