Home Banking Can Banks Withstand the Growing Anti-ESG Movement in the US?

Can Banks Withstand the Growing Anti-ESG Movement in the US?

by internationalbanker

By Hilary Schmidt, International Banker


It has become one of the most frequently used—and most frequently misused­—terms in Western political discourse, particularly in the United States. Indeed, barely a day goes by without the word woke being employed to describe a certain advocacy movement—as both a term of support for the said movement by one political faction and a term of denigration by another. And with environmental, social and governance (ESG) at the heart of this discussion, US financial firms now have to reckon with an anti-ESG backlash that seeks to put the brakes on “woke investing”.

Legislation is gathering pace in certain US states to push back against the growing popularity of ESG-based investing, largely on the grounds that such factors could conceivably limit overall returns and damage certain industries, such as fossil fuels. A February 8 report from the law firm Ropes & Gray found that at least 49 anti-ESG bills have been introduced in the US in 2023 so far, following the 22 introduced in 2022. Perhaps not surprisingly, virtually every bill has emanated from deep-red states—those with heavy Republican majorities—where anti-woke sentiment is typically commonplace.

Indeed, the historically Republican state of Texas kicked things off by passing a law in 2021 preventing the state’s pension funds and other state entities from investing in companies that divest from fossil fuels, including BlackRock, Credit Suisse Group, Jupiter Fund Management, Schroders and UBS Group. Since then, other red states have been keen to follow in Texas’s footsteps.

“What we’re seeing is a core group of Republicans who are taking on this issue and trying to make it a retail political issue and are still hammering it out,” John Miller, director of ESG and sustainability policy at the Cowen Washington Research Group, recently explained to Politico. “The more extreme language could have some really chilling effects on how capital is allocated and limit some investment decisions.”

Such concerns are perhaps no more clearly exemplified than by the legislation announced on February 13 by Florida’s Governor Ron DeSantis to “protect Floridians from the woke ESG financial scam”, which would include prohibiting big banks, trusts and other financial institutions from discriminating against customers for their religious, political or social beliefs, including their support for securing the border, owning a firearm and increasing energy independence. The proposed bill also prohibits the financial sector from considering so-called “social credit scores” in banking and lending practices that aim to prevent Floridians from obtaining loans, lines of credit and bank accounts. “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 added. “Through this legislation, we will protect the investments of Floridians and the ability of Floridians to participate in the economy.”

Senator Pat Toomey (PA), the senior Republican on the Senate Banking Committee (United States Senate Committee on Banking, Housing, and Urban Affairs), meanwhile, urged the chief executive officers (CEOs) of the biggest US banks to stop “embracing a liberal ESG agenda that harms America” at a Congressional oversight hearing in September 2022. But with the number of investors and financial institutions keen to demonstrate accountability in their investment decisions for such issues as climate change, gender and racial workforce diversity as well as sound corporate governance continuing to grow, banks and fund managers have largely welcomed the integration of ESG factors into the design of their financial products.

Indeed, global ESG funds currently manage nearly $8 trillion in assets, a number that is twice as much as it was just seven years ago, with JPMorgan Chase noting that more than $500 billion flowed into ESG-integrated funds in 2021 and contributed to a sizeable 55-percent growth in assets under management (AUM) in ESG-integrated products. That said, investors have recently pulled back from ESG funds, particularly as high oil prices have impacted returns. US ESG funds experienced outflows of $6.1 billion in 2022’s fourth quarter, compared to the $0.3 billion of net inflows recorded the previous quarter, according to investment bank Jefferies, which attributed much of the drawdown to this ongoing anti-ESG backlash.

But despite the increasingly frequent introduction of these Republican-sponsored anti-ESG bills, banks and other financial firms continue to push back against them resolutely, often with much success. The start of February, for instance, saw the House of Representatives of the Republican supermajority-held state of North Dakota decisively vote down a bill that would have required the state treasurer to boycott investment firms over their ESG policies, the final vote tally being a resounding 90 against to 3 for it. “This bill, while well-intended, had too many unintended consequences that would have hurt our own Bank of North Dakota and other main street banks that do support our state’s [agriculture] and energy businesses,” Rep. Mitch Ostlie, a sponsor of the bill, acknowledged.

“We have a philosophical issue about anytime the government puts together a list,” said Rick Clayburgh, president and CEO of the North Dakota Bankers Association (NDBA), who is now working with lawmakers on a modified version of the bill. “All of a sudden, a local bank could be added to the list, and it leads to the potential for a bank run if people don’t want to do business with that bank, which leads to instability and could shake the underpinning of our entire financial system.”

And in Republican-led Indiana, a bill seeking to prohibit the state’s $42.4-billion public pension fund’s exposure to investment firms that account for ESG criteria looks unlikely to proceed after a “fiscal impact statement” from the Indiana Legislative Services Agency (LSA) found that the bill could slash returns for the Indiana Public Retirement System (INPRS) over the next 10 years by a whopping $6.4 billion for defined benefit funds and by $300 million for defined contribution funds. “A lot of my members have ESG statements,” noted Dax Denton, the chief policy officer of the 116-member-strong Indiana Bankers Association (IBA), who also warned that such statements “could prohibit an institution from being a custodian of the state’s finances as a result of this legislation”.

Nonetheless, Republicans do not appear to be discouraged by such legislative defeats. “State legislators are rightfully concerned with radicalized ESG,” according to the American Legislative Exchange Council (ALEC), a powerful conservative corporate lobbying group, which recently stated that it seeks to address “politically motivated investment strategies that have contributed to severe underfunding in state pension plans across the country”. But the American Bankers Association (ABA) has responded by stating that ALEC’s model proposal “undermined the organization’s own commitment to free markets and limited government” and that “government should not be dictating business decisions to the private sector”.

Indeed, opposing extensive government overreach seems to be among the banking sector’s core oppositional arguments to the anti-ESG legislation presented thus far. The Kentucky Bankers Association (KBA), for example, filed a lawsuit against the state’s Republican attorney general (AG), Daniel Cameron, after he issued subpoenas and civil investigative demands (CIDs) against several major lenders, including Bank of America (BofA), Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, ordering them to hand over documents that contained the words climate or environmental. Kentucky already has a state law in place that seeks accountability for those financial firms that boycott companies deemed not to be sufficiently ESG-compliant. And the AG’s 24 demands for information and 20 separate demands for documents “centers on suspected financial discrimination against companies that do not align with the United Nations’ ‘net-zero’ climate agenda,” Cameron’s office stated.

“On October 19, 2022, AG Cameron exceeded the powers of his office by issuing six ‘Subpoena and Civil Investigative Demands,’” the bankers’ lawsuit filing argued, calling the information request an “amazing” overreach and describing the CIDs as a violation of rights of speech and association guaranteed to them. “The CIDs are creating an ongoing state surveillance system on communications and activities of a recipient and with the persons a recipient is interacting,” the lawsuit added.

In early February, the state of Kentucky also rejected a separate anti-ESG proposal when trustees of its $7.9-billion County Employees Retirement System (CERS) unanimously voted against the state treasurer’s decree to divest from BlackRock and other investment firms over their fossil-fuel policies. The reason given for the rejection was that “it would be inconsistent with our fiduciary duty and responsibility,” Ed Owens III, the public pension system’s CEO, confirmed.

“We’re starting to see rather large cracks appearing” in the anti-ESG movement, Frances Sawyer, a policy adviser to former California Governor Jerry Brown, and Tom Steyer, a climate investor and philanthropist, told the Washington Post in late February. “The whole idea of blacklisting institutions just isn’t it when it comes to free market principles. It feels like government overreach.”


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