Guest Article: Anti-ESG Laws in the US - An Unfortunate Reality

Guest writer and built environment ESG expert Sachi Goel explores the US anti-ESG legislative landscape - and proposes a more constructive path forward to addressing concerns.

What is US Anti-ESG legislation?

Several states in the US have introduced bills to discourage ESG investing. While their complexity, scope and impact vary, these anti-ESG bills can fall into two broad categories:

1. Boycott or discrimination bills: they ‘prohibit’ or discourage public institutions from entering contracts or divest from companies that boycott certain industries including fossil fuels, firearms, etc., or for not meeting their GHG emission targets.

   
   

2. Pecuniary bills: these ‘ban’ state entities from using ESG factors or promoting ESG goals to plan state-led investment portfolios. These bills require state entities to assess the risk of portfolios purely based on financial factors, not social or ideological ones. Republican or redstate lawmakers, for instance, do not believe that factors such as climate risks or board diversity should be considered.

There is thus a certain degree of uncertainty introduced in state-sponsored investments, particularly in those states where the anti-ESG bills are currently pending approval. As per a recent study, the anti-ESG messaging from the government is already leading to financial firms reducing efforts to decarbonize their portfolios. This map clearly shows the horrific number of states proposing, passing, or rejecting anti-ESG laws:

A recent report by Pleiades Strategy revealed that by July of this year, 165 anti-ESG bills were introduced by Republican lawmakers in 37 states. While about half of them were rejected or stalled, proponents of these bills refuse to listen to reason: they ignore any negative impact of such bills on future investor returns. It is also to be noted that bills that are currently pending approval include both state and federal legislation. The idea that the world’s largest economy would discourage any ESG criteria while making investment decisions is a grave headwind for decarbonization efforts.

The ‘Right’ stance on ESG

Prioritizing the environment or even taking measures to combat climate change is widely associated with the ‘woke’ culture by conservatives. Republican US President hopeful Vivek Ramaswamy even launched an anti-woke company – Strive Asset Management, which recently passed the billion-dollar mark in assets under management. The mantra of his company is ‘shareholder primacy’ over World Economic Forum’s ‘stakeholder capitalism’ - the former disregarding operational effects on anyone other than investors. Another GOP Presidential candidate, Ron De Santis, who is currently also the Florida Governor, approved a bill that bans state entities from investing money to promote ESG goals and has even prohibited ESG bond sales.

Former President Donald Trump needs no introduction, of course, after having notoriously withdrawn from the Paris Agreement in 2019. He called those investing in ESG funds ‘sick’ and vowed to restrict public retirement funds from investing in ESG assets. The 2024 presidential elections would not only impact future global economic growth but also the perception and performance of ESG funds worldwide in the coming years. What is more worrisome is the influence of American politics and hence regulations in other countries: Recently, the winning of right-side candidates in Argentina and the Netherlands raises the question: would this anti-ESG propaganda now go international?

The ‘financial’ vs ‘social’ factor debate

There is an argument that fiduciary duties should include ESG considerations, particularly if we also look at this map of the US. It shows billion-dollar weather and climate disasters across the US in 2022 alone. Surely commonsense dictates that any investment in these disaster-prone areas without considering the ESG criteria would be the absolute opposite of fulfilling their fiduciary duties.

As these bills are relatively new, they are also open to interpretation. Supporters of these bills suggest that there isn’t a complete ‘ban’ on considering ESG factors while investing - rather state fund managers could still make decisions based on these factors - as long as they continue to pursue financial returns. What is shocking is that there are conversations to blacklist Wall Street firms, which have been traditionally touted as those with high financial prudence – just for considering ESG factors. Asking state pension funds to switch financers also leads to higher interest rates and hence milliondollar losses.

It should be no surprise that Blackrock’s CEO Larry Fink decided to remove the term ‘ESG’ from its reports, as it became too ‘weaponized’ and ‘politicized’. Meanwhile, after being threatened to be blacklisted in Texas, Fink claimed that divestment from fossil fuel companies is not their policy – and touted Blackrock to be one of the world’s largest investors in fossil fuel companies.

I believe the concerns about greenwashing or the reliability of ESG data are valid, however, we should look at developed countries moving towards improving the quality of data standards rather than discard them as valuable investment criteria. Additionally, a statement by the Securities and Exchange Commission (SEC) commissioner that they are NOT the Securities and Environment Commission, at least not yet, displays how biased the government could be against ESG. SEC’s mission on their website is thus highly ironic: they talk about overseeing federal securities laws and protecting investors to ensure truth and fairness!

The regulatory implications of these anti-ESG bills in the US can thus be even more dangerous: not only would they discourage private firms from investing in the local states, but also adversely impact foreign investment flows.

It is to be noted that the opposition to these bills comes from across the investor forum: blue states, asset or fund managers, insurers, bankers, brokers, investment advisors, business leaders, and even the chamber of commerce. While the impact of these anti-ESG bills or laws is yet to be fully understood, we know the complexity of ESG multiple ratings and laws across nations. This raises another point - we now need to look at both pro-and anti-ESG across states within the same country, hence making it even tougher for multinational corporations to operate. Of course, one way forward is to put in time and effort to educate the American public so they may understand climate science better. However, the real question for me is, is this going to be the legacy of America, which we currently call the leader of the free world?

Sachi Goel is an experienced research professional, with deep knowledge of the built environment transitioning into ESG reporting. She is passionate about the environment and committed to making a difference by helping corporations reduce their carbon footprint. You can find Sachi on LinkedIn here.