Environmental, social, and governance (ESG) has taken the financial world by storm. Various institutional investors, pension funds, college endowments, and even regular retail investors have plowed plenty of assets into the trend. The goal? Matching investment dollars with ideas outside traditional financial metrics.
But not everybody is on board with the ESG movement.
ESG and socially responsible investing (SRI) has quickly become a flash-point for various political pundits and lawmakers. That’s gone as far as bans and new laws prohibiting the use of ESG metrics in investment decisions. The question now is whether or not the movement will be seriously impacted or grow even stronger from the recent laws.
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Texas and Florida Lead the Way
At its core, ESG isn’t designed to be a political movement or investment trend. However, lately, politics have entered the $35 trillion global ESG market, chiefly the bans and laws enacted by several key Republican states.
Citing BlackRock’s focus on ESG, green energy, and being anti-fossil fuels, the Texas state legislator was the first to rally against ESG. This included the state writing legislation that forced pension funds, state universities, and other state entities to not use a set of asset managers and banks that have an ESG tilt. Florida soon followed with its own set of laws and rules banning pension and state fund managers from using ESG in decision making.
There are now more than 21 states with anti-ESG laws and rules on their books and more than 35 additional anti-ESG bills pending. Moreover, Florida governor Ron DeSantis recently created a coalition of 19 states to use their pension funds to undermine ESG efforts in the United States. By using their capital together, the hope is they can push policy and stop ESG investing.
The anti-ESG fervor has even reached the federal level. A recent bill—which was vetoed by President Biden—looked at removing recent Department of Labor considerations with regard to ESG investing in retirement plans.
ESG Is Still Shining
Despite the recent anti-ESG bills and waves being made by several states, the ESG movement has continue to grow, even in so-called red states.
For starters, for every anti-ESG bill, there seems to be another Democrat-led state introducing a pro-ESG bill. California continues to push for its massive CalPERs and CalSTERs pension funds to divest of fossil fuels and use ESG screening in their investment decisions. New York has followed suit with similar demands for its various state pension funds. The same could be said for New England. Given the size of many of these funds, the capital flowing into ESG funds has continued to eclipse much of the flows out.
And there is evidence that even some of the anti-ESG states are rethinking their decisions. Recently, the Republican-controlled North Dakota House of Representatives voted down legislation boycotting investment firms with ESG policies, citing the potential harm to its own state’s banks. Kentucky’s $7.9 billion County Employees Retirement System went against a recent governor decree that would have it divesting from BlackRock, citing that complying would be “inconsistent with our fiduciary duty and responsibility.” Finally, Indiana rebuked an anti-ESG law after analysis found its main pension fund would lose out on about $6.7 billion in gains over a ten-year period by shifting from its ESG-focused asset managers.
Even Texas may be considering a softer approach on ESG. A recent study from the Chicago Fed showed that in its two years of enactment, Texas municipalities saw their borrowing costs increase by about $500 million after being forced to boycott lenders and asset managers.
ESG Going Forward
With ESG becoming a battleground for political pundits and ideologies, the question for investors is whether or not ESG can survive and thrive going forward. The answer may be a resounding yes. However, it may take on a different form than we expect.
If there’s one thing that’s been good from all the anti-ESG bills, it has to be the current trend of greenwashing. Thanks to the popularity of ESG, Wall Street has slapped ‘ESG/SRI’ on every other fund and product. The various anti-ESG laws have continued to expose several of these and now investors have been moving toward ‘pure’ ESG investments.
Second, ESG may be a trend that investors will be forced to do on their own. Depending on what state you live in, access to ESG could be an asset allocation decision with your private money, even outside 401ks and similar qualified retirement plans. As the DOL rules continue to be challenged, it might be some time before we see ESG funds in your retirement plan. And that means going the ESG route on your own.
The Bottom Line
Nonetheless, despite all the backlash and recent laws in several states condemning ESG, the trend remains firmly in place. With highly-rated ESG stocks and bonds having numerous financial benefits outside the social ones, many investors and large pension funds are still seeing the merits of adoption. And that will keep the ESG train chugging along.
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