Red states dig in on ESG investing
Republican-controlled state legislatures are increasingly seeking to push back against companies that practice so-called environment, social and governance investing.
Florida pulling $2 billion in assets managed by BlackRock last week was the latest move by a red state to combat investment decisions being made on factors beyond the bottom line.
Republican-controlled state legislatures are increasingly seeking to push back against companies that practice so-called environment, social and governance investing, which considers non-monetary factors such as climate change in an effort to ensure positive long-term outcomes.
“I think a battle is about to erupt on this topic,” said Idaho state Rep. Barbara Ehardt (R), who is readying another anti-ESG bill for the next session.
Ehardt expects legislation to be put forward in other states as well, and by Republicans in Congress.
“That is completely antithetical to our American way of life,” Ehardt said. “It’s antithetical to a free market. And it’s certainly antithetical to our Constitution.”
According to the law firm Morgan Lewis, 18 states this year proposed or adopted legislation limiting the state government’s ability to do business with entities that are identified as boycotting specific industries based on ESG criteria.
Pensions are the lion’s share of funds that states control. State and local government pensions hold about $5.08 trillion.
Despite the legislation, not much has come from bills pushing state pension funds to divest from companies said to be engaged in ESG investing.
“The actual amount of divestment among public pension funds on this and other issues over the years, really has been rather small,” said Keith Brainard, research director for the National Association of State Retirement Administrators. “It gets a lot of attention but … there’s a lot of smoke [and] not a whole lot of fire.”
There has been little divestment by pensions because pension managers and the boards that typically make investment decisions are required to act as fiduciaries, which means they must act in the best interest of the pension participants. That entails maximizing the fund’s investment return within an appropriate level of risk.
Brainard, based in Texas, pointed to a law passed there last year that required the state’s pensions to divest from businesses that boycott fossil fuels. But the law was written with loopholes and carve-outs, partly to allow pension managers to continue fulfilling their fiduciary responsibility.
“As far as I know, no divestment pursuant to that legislation has actually occurred,” Brainard said. “And it’s possible that no divestment will take place.”
Florida Gov. Ron DeSantis (R) has been a vocal ESG opponent. Before Florida pulled funds from BlackRock, DeSantis’ administration approved a resolution in August directing Florida’s fund managers to invest state funds to seek the highest return and without considering ESG factors, essentially reaffirming their fiduciary role.
In response, a group of state treasurers signed a letter in September supporting ESG investing and criticizing states that blacklist companies that have taken social stances.
Last month, a group of attorneys general from California and other Democratic strongholds penned a letter saying that considering factors such as climate-change risks “can provide significant financial benefits to investors.”
Ehardt said that the ESG issue is relatively new and legislating it out of the financial system will take some time and trial and error. She said her bill, which is still being worked out and on which she’s working with conservative groups such as the Heartland Institute, would require mostly financial institutions to disclose if they do ESG investing and bar those that do from doing business with the state.
Ehardt said she hopes to grow the number of states that pass anti-ESG legislation, which would increase leverage with large banks and companies. Uniting like-minded states has been a hallmark of the anti-ESG movement.
Missouri and Louisiana pulled hundreds of millions in funds out of BlackRock in October. Utah Attorney General Sean Reyes (R) led a group of 13 state attorneys general that wants the Federal Energy Regulatory Commission to reject an application from the Vanguard Group, the second largest money manager, to buy shares of public utilities.
They raised concerns that Vanguard’s avowed support for reducing carbon emissions could lead to higher utility prices.