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Sustainability Matters

The Anti-ESG Rhetoric and Actions of Republican Politicians Are Bad for Investors and Business

Texas, Florida take aim at ESG, while asset managers, end investors, and businesses embrace it.

author

Jon Hale

The anti-ESG rhetoric and actions of Republican politicians have reached a fever pitch.

Texas comptroller Glenn Hegar announced this week that the state has blacklisted BlackRock, nine other asset managers (all European based), and nearly 350 mutual funds for supposedly “boycotting” the fossil fuel industry. The list was required by a law Texas Republicans passed last year, aimed to prevent state investment and pension funds from investing in funds that exclude fossil fuels.

Not to be outdone, Florida Gov. Ron DeSantis and the State Board of Administration approved a resolution this week prohibiting the state of Florida’s fund managers from considering all environmental, social, and governance issues. DeSantis had previously taken steps to assure that Florida fund proxy votes would reflect his views and not those of asset managers that may consider ESG concerns in their votes.

Other Republican-led states have threatened or taken similar action, and being anti-ESG is a badge that some Republican candidates are wearing proudly this campaign season.

Investors Aren’t Clamoring for Anti-ESG Policies

Whether voters will respond is another matter. It’s not as if there is any clamor from everyday investors to stop their fund managers from considering climate change and other material ESG risks in their portfolios.

To the contrary, investors, individual and institutional, large and small, are broadly interested in sustainable investing, a range of investment approaches that use ESG information. Surveys show anywhere from half to 85% of investors indicating interest, and the percentage is consistently higher for those under 50. Flows into sustainable funds and exchange-traded funds have skyrocketed in recent years. Even this year, when fund investors have withdrawn money in record numbers, flows into sustainable funds have held up better.

Likewise, pension plan participants are not demanding less ESG. There was certainly no groundswell of opposition from plan participants last year to the U.S. Department of Labor’s proposed rule that would make it clear that Erisa plan fiduciaries can consider ESG in their management of retirement plans. Of the more than 22,000 comments submitted by individuals, 97% supported the proposed rule.

Virtually All Asset Managers Use ESG Information

Nearly all asset managers have come to believe that considering climate and other ESG information is the prudent thing to do, helping them fulfill their fiduciary duties toward their clients. A Russell Investments survey of asset managers last year found that 82% of U.S.-based asset managers systematically incorporate ESG information in their investment process. The percentage approaches 100% in the United Kingdom and Europe.

They do so because ESG information gives them a more complete picture when they evaluate an investment. Asset managers have a fiduciary duty to consider these issues, which they also have when deciding how to cast their proxy votes. They are professionals who know what they’re doing, acting in the interest of their investor/clients to maximize risk-adjusted returns. With climate risks, in particular, growing by the day, asset managers would be negligent to ignore the potential impact on their investments.

Just ask yourself who is likely to know better how to invest your money—professional asset managers or politicians? I’ve known many of both over the years, and believe me, not very many politicians of either partisan stripe know the first thing about investing.

What’s Behind the Anti-ESG Push?

Grievance Politics

First, these efforts are an attempt to gin up another phony grievance about how “liberal elites” are destroying the country that is a staple of the Republican playbook today. Take a concept that few people know much about—ESG—and define it in the most extreme, distorted way possible. Remember CRT? This kind of rhetoric reflects psychological projection: By painting your opponent as a radical extremist, you make your own views seem less extreme.

But professional asset managers are hardly motivated by ideological concerns. The idea that they are themselves extremists is laughable. Simply put, they are about making prudent assessments of investment risks and opportunities, and most of them use climate and other ESG information to help them do that.

Fossil Fuel Protectionism

This is also an attempt by energy-state politicians to protect the fossil fuel industry from the free market. Texas Republicans see the basic contours of what will happen in the coming energy transition: As government policies at the federal level, in many states, and around the world increasingly support the transition to renewable energy, and companies and consumers change the sources of their energy consumption, demand for fossil fuel-based energy will fall, shrinking the size of the oil and gas industry, leaving companies with stranded assets and outdated business models. In such a scenario, investors are bound to seek better opportunities elsewhere in the economy.

Against that backdrop, the Texas move to boycott asset managers that are currently trying to manage the impact of this transition on their portfolios is simply a protectionist delay tactic. It will be detrimental to those who rely on state investment funds, like public school and state employee pension participants. Then again, those folks’ economic fortunes have been buffeted by the fortunes of the oil and gas industry for their entire lives. C’est la vie, I guess.

As Wharton School professor Witold Henisz noted in an essay this week, it wasn’t so long ago that the delay tactics were about discrediting climate science. Today, they’re about discrediting the incorporation of climate science into investment considerations.

Antistakeholder Capitalism

Beyond fossil fuel protectionism, Republicans like DeSantis are enraged that corporations are forging better relationships with their employees and communities. “Corporate power,” DeSantis says, “has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity.”

Behind that word salad is the claim that this corporate road to self-destruction is paved with DEI programs and CEOs criticizing Republican policies that they think are detrimental to their business.

But the real reason corporations have ESG and DEI programs is that it’s just good business. DEI reflects the ways that companies are addressing the needs of a diverse American workforce that’s no longer dominated by straight white men. There are nearly as many women as men in the overall workforce, more women than men in management and professional-level jobs, more women receiving college and graduate degrees, more people of color, more LGBTQ+ people, and more foreign-born people.

That’s diversity as a fact, not ideology. Companies recognize the value of a workplace that is welcoming for all, and of having hiring, pay, and benefits policies that will attract great employees from this diverse pool of workers. Companies are also coming to understand the importance of corporate purpose to their employees. They are increasingly recognizing the value of addressing material ESG issues not only to employees but customers, as well.

And the real reason that companies are speaking out on issues is that Republican policies on a range of what have heretofore been considered “social” issues aren’t good for business, either. Companies that welcome and want to retain a diverse workforce don’t want their workers discriminated against or vilified in their communities.

Two of Indiana’s largest corporations and employers, Eli Lilly LLY and Cummins Diesel CMI, recently came out against the state’s restrictive abortion law. Said Eli Lilly: “This law will hinder Lilly’s — and Indiana’s — ability to attract diverse scientific, engineering and business talent from around the world.” Lilly also noted the Indiana abortion law would force it to “plan for more employment growth outside our home state.” Said Cummins: “We are deeply concerned about how this law impacts our people and impedes our ability to attract and retain a diverse workforce in Indiana.” This is not a reflection of CEOs having become extremists all of the sudden; they are responding to extremism and doing so as a matter of enlightened self-interest.

Anti-ESG Policies: Bad for Business, Bad for Investors

So the bottom line for asset managers and the companies in which they invest is that considering climate and other ESG-related risks and opportunities is about business, not ideology. Those wishing to ignore these realities, says Mindy Lubber, leader of the sustainability nonprofit Ceres, “will be caught flat-footed, with investors—including millions of future retirees banking on long-term success—standing to lose the most. It’s bad business in its own right, but using the power of government to direct these losing investments makes for even worse public policy.”

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar’s investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.

Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.