ESG split deepens between red and blue states

Coinciding moves this week highlighted the deepening split between Republicans and Democrats over factoring environmental, social and governance criteria into investment decisions.

Florida Gov. Ron DeSantis (R) proposed anti-ESG legislation to prevent banks in Florida from considering social and other nonfinancial factors when lending or investing. The same day, Arizona Attorney General Kris Mayes (D) announced the state would drop investigations of banks over the issue.

The issue is taking a prominent place in the political landscape, with officials at all levels of state government debating it in granular detail.

“I think you’re gonna see a clash of ideals,” said Idaho Rep. Barbara Ehardt (R) when asked about the escalating ESG debate.

Ehardt, who has championed anti-ESG legislation, drew a contrast with neighboring Oregon and Washington State, which she argued will seek to pass legislation that does not align with conservative Idaho values.

DeSantis is a leading ESG critic, and his legislative proposal includes language prohibiting banks that engage in corporate activism from holding government funds as a “Qualified Public Depository,” which is required to operate in the Sunshine State.

The legislation prohibits using ESG in all investment decisions at the state and local level and bans the financial sector from considering so-called “Social Credit Scores” in banking and lending practices. It also prohibits Florida and its local governments from using ESG factors when issuing bonds, including a contract prohibition on rating agencies whose ESG ratings negatively impact the issuer’s bond ratings.

“By applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda,” DeSantis said in a statement.

Other Republican-led legislatures have also weighed banning ESG, while states including California have come out in support of the practice.

Florida and Texas, where Gov. Greg Abbott (R) has sought to rein in ESG, both have triple-A bond ratings from the major credit rating agencies. But the two states pay more to borrow than California, where Gov. Gavin Newsom (D) has embraced ESG, according to a recent Bloomberg analysis.

Typically states with the highest credit ratings are deemed to have lower risk associated with their debt and pay lower costs to issue bonds. But, according to the Bloomberg analysis, increased borrowing costs result from Florida and Texas ruling out doing business with banks that they say practice ESG investing limits the pool of financial institutions with which the two states may engage.

The story was not lost on Newsom.

“Here’s an interesting fact that FL and TX skip over when they talk about ESG policies,” Newsom said on Twitter. “While they blacklist firms because they support good environmental practices, they pay more than CA to borrow. Hundreds of millions of dollars more. The cost is passed down to their residents.”

Republicans in Nebraska and Utah have also pushed ESG investing bans. In Nebraska, legislation was introduced requiring fiduciaries to take into account only financial factors when discharging their duties concerning investments of public funds.

In Utah, Attorney General Sean Reyes (R) led a 27-state group in a letter to GOP congressional leaders in support of a resolution that would block the implementation of a Biden administration rule. They said the rule violates the Employee Retirement Income Security Act by allowing ESG investing.

Meanwhile, Mayes, who was elected narrowly last year, announced that Arizona would no longer participate in an investigation launched in October with 18 other Republican attorneys general into Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Former Arizona Attorney General Mark Brnovich (R) had joined the investigation, seeking documents related to participation in the United Nations’s Net-Zero Banking Alliance, which seeks commitments from affiliated banks aligning their lending and investment portfolios with net-zero emissions by 2050.

“While my predecessor’s administration spent time and resources launching politicized investigations into the environmental sustainability efforts of major financial institutions,” Mayes said in a statement, “my administration is committed to using the tools and resources at our disposal to protect and secure the rights of Arizonans on matters that affect their daily lives.”