The Biden-Harris’ Administration’s Inflation Reduction Act (IRA) will drive roughly $369 billion to climate-related initiatives across the US. That’s a huge influx of funds for states, and it’s had surprising results. A new trend is taking place: some key red state legislators to hit pause on proclamations to eliminate ESG investments — those Environmental, Social, and Governance-oriented financial considerations that take into account non-financial information about a company, such as its climate impact and staff diversity.
The federal endorsement of sustainable investments is actually prompting some red state legislators to embrace ESG positions. What was once a red state onslaught against ESG investments is now a lot more like a pink puff of occasional air.
Last year this move toward ESG investments seemed totally improbable.
“We see ongoing headline risk for asset managers and lending institutions” from all the ESG backlash, says John Miller, an analyst at Cowen Inc’s Washington Research Group. He separated the GOP’s anti-ESG messaging into 4 buckets:
- Materiality: Climate and social risks are political and pose little financial and material risks.
- Proxy voting: Third-party shareholder advisory firms are biased towards progressive agendas so their role should be significantly reduced.
- Antitrust: Investor-led collaboration on sustainability issues leads to collusion by fixing prices and limiting consumer options.
- Fossil fuels: ESG investors want to defund targeted industries by closing off access to capital.
“The messaging from the Republicans and Democrats will evolve into the 2024 election cycle,” Miller predicts. “We see few off-ramps.”
Anti-ESG Rhetoric Gets Slapped Down
Sure, a few red state high-profile leaders continue to boast about profits over people, of dollars over decency. However, now that midterm elections are over and seats are secured, a group of traditionally-conservative governors with aspirations beyond state government are leaning more toward centrist ESG positions. Some are even moving ahead with their own rules to address sustainability concerns and lower greenhouse gas emissions, according to Bloomberg.
In Virginia, Governor Glenn Youngkin (R) was recently quoted as asking, “Is having world-class transparency and governance a good thing?” His answer? “Yes, it’s a really good thing. But the definition of what’s good for the environment, social goals, and governance isn’t one-size-fits-all.” Such acquiescence is likely the result of pressure from Virginia-based companies like Hannon Armstrong, Mars, Nestlé, Unilever, and Workday, among others. These companies wrote a collective letter that urged state lawmakers to build upon the “considerable progress” made in recent years to grow a robust clean energy economy.
In Minnesota, Governor Tim Walz (D) signed legislation establishing a statewide carbon-free electricity standard.“ Walz has been among the most outspoken advocates of environmental measures. “We’re going to lead Minnesota to 100% clean electricity by 2040,” said Lieutenant Governor Peggy Flanagan in a statement announcing the new initiatives. The Minnesota bill, signed earlier this month, establishes a standard for utilities to supply customers with electricity generated or procured from carbon-free resources, beginning at an amount equal to 80% of retail sales for public utility customers in 2030 and increasing every five years to reach 100% for all electric utilities by 2040. The bill also requires that, by 2035, an amount equal to at least 55% of an electric utility’s total retail electric sales be generated or procured from eligible energy technologies.
In New Jersey, Governor Phil Murphy (D) announced a series of steps aimed at achieving 100% clean energy by 2035. Murphy envisions the Garden State attaining 100% clean energy, in part by ensuring all new cars sold by 2035 are zero-emission. Additionally, the state is setting a target of installing zero-carbon emission space heating and cooling systems in 400,000 homes and 20,000 commercial properties by 2030. Another measure is to enact rules that enhance flood protection in river and coastal areas.
DeSantis: An Ideological Step Behind with ESG Investments?
Over the last couple of years, several red states that are beholden to corporate conservatives and the fossil fuel industry have tried to limit ESG investments with publicly invested funds. Florida Governor Ron DeSantis is such an activist red state politician. With his support, the Florida Trustees of the State Board of Administration (SBA) formally approved measures to protect Florida’s investments from “woke environmental, social, and corporate governance (ESG), ensuring that all investment decisions focus solely on maximizing the highest rate of return.”
Saying that US corporations “continue to inject an ideological agenda through our economy rather than through the ballot box,” the spring 2023 legislative session will consider language that:
- Prohibits big banks, credit card companies, and money transmitters from discriminating against consumers for their religious, political, or social beliefs;
- Bars financial institutions from considering so called “ESG Credit Scores” in banking and lending practices to prevent Floridians from obtaining financial services like loans, lines of credit, and bank accounts;
- Permanently prohibits State Board of Administration (SBA) fund managers from considering ESG factors when investing the state’s money; and,
- Requires SBA fund managers to only consider maximizing the return on investment on behalf of Florida’s retirees.
Indeed, while far-right Republicans such as DeSantis rail against ESG investments, politicians elsewhere have moved on, at least when it comes to the IRA’s environmental aspects and fiscal potential. Many state leaders just can’t take the risk that ideology will backfire on them when it comes to funds flowing to their states.
The Evidence for ESG Investments Builds
Kentucky County Employees’ Retirement System’s board has informed state Treasurer Allison Ball it will not divest from BlackRock. These pension plan executives have said the state treasurer’s decree for them to withdraw funds from financial-services firms deemed contrary to Big Oil interest violated their fiduciary duty.
The $10.8 billion Frankfort-based pension fund’s board approved a draft of a letter that responds to Ball’s January 3 publication of a list of 11 financial companies that she determined are engaged in boycotts of energy companies. A draft of the letter included with board meeting materials said the system has determined that requirements in state statute establishing the board’s fiduciary responsibilities means the board is not subject to the requirements of the 2022 law.
Power brokers are seeing the winds of change around them. Many constituents are stepping back and unpacking distinctions between what companies disclose and what they actually do, to the point where discrepancies are forming the basis of ESG lawsuits seeking redress. Some regulators are calling for explicit statutory mechanisms to determine ESG merit.
Working conditions in companies have become a screen for potential investments. Shareholders’ resolutions and dialogue are altering some companies practices and behavior. This tactic is known in the investment industry as “engagement,” and over the last year it became clear that many more shareholders are getting involved with the companies in which they invest. They’re prodding companies to increase environmental responsibility, and their persuasive techniques are paying off.
Our love of things has been for the longest time a product of accepted wisdom that consumption is essential to economic growth, since our demand for things makes companies profitable and provides employment. But because environmental and social justice impacts are not figured into purchase costs, the impacts on the planet from our household consumption have a drastic effect on the environment. Now the impacts are touching our wallets, too.
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