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A year of acrimonious ESG battles comes to a close with more in store for 2023

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Ron DeSantis, the Republican governor of Florida, is an outspoken critic of ESG policies. Florida is divesting $2 billion in state treasury funds from BlackRock over the firm's sustainability views.
Source: Joe Raedle/Getty Images News via Getty Images

Over the past year, simmering discontent over the three-letter corporate acronym ESG blew into a partisan firestorm.

Republican state officials embarked on an unprecedented campaign in 2022 to rid public pension and treasury funds of investments held by banks with environmental, social or governance priorities. At the same time, the corporate embrace of ESG programs continued to gain traction.

The GOP's anti-ESG crusade will now move to Congress, where Republicans — who will control the House in 2023 have pledged to hold hearings on such matters.

"I hope Congress can step up and rein in this attempt to dupe Americans into using their retirement plans to fund woke social initiatives," West Virginia Treasurer Riley Moore said in a Dec. 1 statement. The treasurer came out swinging against a new U.S. Labor Department rule rolling back a Trump administration rule that had prohibited pension fiduciaries from considering ESG.

The movement took off in January when West Virginia cut ties with BlackRock Inc. over the firm's decision to exit investments in thermal coal companies to reduce climate-related risks. A day earlier in his annual letter to CEOs, BlackRock's chief executive Larry Fink had argued that stakeholder capitalism is neither political nor "woke," as his critics had alleged; "it is capitalism."

Fink's continued efforts to allay concerns over his firm's strategies did little to slow the anti-ESG crusade as fossil fuel-heavy states warned that corporate overreach could harm their fossil fuel industries. The movement would soon affect all major U.S. financial firms and some based in Europe.

Banks blacklisted, subpoenaed

In mid-March, Texas Comptroller Glenn Hegar sent letters cautioning 19 large banks that they could be included on the state's list of "financial companies that boycott energy companies." After the U.S. banks responded with letters outlining their extensive fossil fuel investments in Texas, the state withdrew its investments from only one, BlackRock.

Texas also blacklisted nine European banks and 348 investment funds, preventing the state pension fund managers from investing in any of the funds or any funds managed by the banned banks.

A flurry of similar initiatives followed. In October, a Republican-led coalition of 19 attorneys general subpoenaed six top banks in the U.S. over their involvement with the United Nations-convened Net-Zero Banking Alliance. The same month, Missouri banned BlackRock from managing any part of its $9.5 billion state retirement system, citing the asset manager's "left-wing social and political agenda."

Then, in November, a coalition of 13 Republican attorneys general opened a new and unlikely front against corporate ESG policies: the Federal Energy Regulatory Commission. The states' chief legal officers argued that Vanguard Group Inc., the world's second-largest investor, should not be allowed to acquire shares of U.S. utilities as long as the firm participates in the U.N.'s Net Zero Asset Managers Initiative and the Ceres Investor Network.

A Vanguard spokesperson said it looks forward to "working through the regulatory process." But within days the company announced it would withdraw from the U.N. initiative. Vanguard said the decision would bring more clarity for its investors and how the company thinks of material risks.

US companies stay the ESG course

Nevertheless, observers say they are seeing little evidence that the 2022 anti-ESG campaign has had a chilling effect on corporate America or its investors.

"I think we're seeing the biggest appetite coming from the U.S. in terms of getting [ESG] done," said Marjella Lecourt-Alma, the CEO and founder of Datamaran Ltd., a London-based risk management company.

Datamaran has a data-driven analytics platform that is helping large companies such as American Electric Power Co. Inc., Public Service Enterprise Group Inc., Chevron Corp., PepsiCo Inc. and JPMorgan Chase & Co. assess ESG and other corporate risks.

"Things sort of slowed down in Europe because there's a feeling that they already have everything covered, but in the U.S. a lot of companies are still waking up to ESG," Lecourt-Alma said in an interview. "Their investors are following what's going on in Europe and U.S. companies want to get ahead of that."

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Datamaran in September secured approximately $14.27 million in funding led by AEP and Fortive Corp., another major U.S. company.

"The ESG landscape is constantly evolving," Sandy Nessing, AEP's chief sustainability officer, said in a statement at the time. "Having access to data-driven information about how and when those changes are occurring allows us to identify emerging issues and trends that could impact AEP."

In parallel to such developments, the anti-ESG movement has reached Congress and may filter into the 2024 presidential campaign.

Five GOP senators on Nov. 3 warned 51 law firms that their clients' ESG initiatives could violate antitrust laws. The firms should preserve any documentation from their consultations with clients over ESG in anticipation of congressional scrutiny "over the coming months and years," the senators wrote.

'Anti-American'

The House is also planning hearings on the SEC's proposed rule requiring publicly traded companies to report greenhouse gas emissions and other climate risks.

"SEC Chair [Gary] Gensler is using the rulemaking process to implement social and climate policies through mandated disclosures — which is contradictory to established law that already requires companies to disclose information if it is material to investors," Patrick McHenry, R-N.C. and ranking member of the House Financial Services Committee, said in an emailed statement. "Committee Republicans will work together to conduct appropriate oversight of activist regulators and market participants who have an outsized impact."

Former Vice President Mike Pence, a potential 2024 GOP presidential candidate, praised Florida for its decision to divest a record $2 billion worth of state treasury assets under management by BlackRock.

"I don't need to tell you that ESG is a pernicious strategy that allows the left to accomplish what it could never hope to achieve in the ballot box or through free-market competition," Pence told the audience on Dec. 1 at an American Legislative Exchange Council policy summit in Washington, D.C. "ESG empowers ... bureaucrats and regulators and activist investors to rate companies based on their adherence to left-wing values. It is anti-free market, it is anti-freedom and it is anti-American."

ESG proponents say such political arguments ignore the fact that investors are the ones pushing for more ESG disclosures, as they have the right to do in a well-functioning market economy.

"Enabling them to make more informed choices should be something proponents of an efficient and free market favor," Nathan Fabian with the investor group Principles for Responsible Investment wrote in a November opinion piece in The Hill. "Yet many of the critics of ESG seem [averse] to the idea of letting investors pursue what they believe is in their best interest."

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