Geospatial ESG investing
Even as the US Senate approved President Joe Biden’s flagship climate and economy package, aka ‘The Inflation Reduction Act of 2022’, which includes some of most significant climate change legislation to date in the US (including USD369 billion in funding for climate and clean energy), anti-ESG momentum is growing in Republican-controlled states, led by those states with strong links to the fossil-fuel industry.
The Republican state governor of Texas, Greg Abbott, got the ball rolling in June 2021 when he signed into law an ‘anti-ESG bill’ (SBs. no.13/19, 2021) prohibiting state financial institutions (including its six pension funds) from contracting with or investing in businesses that divest from coal, oil or natural gas companies.
Republican lawmakers in the states of Indiana, Ohio and West Virginia introduced similar bills in early 2022, the texts of which hue closely to the Energy Discrimination Elimination Act, drafted by the right-wing American Legislative Exchange Council (Alec) to shield ‘Big Oil’ from ‘boycott’ measures by institutional investors and others.
Republican state officials led by West Virginia’s treasurer Riley Moore have also compiled blacklists of financial firms in the process of moving away from fossil fuels, including mutual funds, SMAs, ETFs and big-name institutional investors such as BlackRock, Goldman Sachs, Wells Fargo, JP Morgan and Morgan Stanley. Moore, who pulled the state pension fund out of BlackRock, claims a coalition of 15 states (including Texas) willing to do likewise, to the tune of hundreds of billions of dollars.
And latterly, Florida governor and presidential aspirant Ron DeSantis has also jumped on the anti-ESG bandwagon, in late July proposing a law for the 2023 legislative session that would amend Florida’s Deceptive and Unfair Trade Practices statute to prohibit large banks, credit card companies and money transmitters from not investing in certain public companies based on their ESG ratings. The proposed law would also prohibit fund managers for the State Board of Administration (SBA) from implementing ESG analysis in their management of the state’s pension fund portfolio.
The Florida SBA oversees some USD250bn in total assets and manages money for the Florida Retirement System, plus some 25 other funds. Under the proposal, managers would be required to ‘only consider maximizing the return on investment on behalf of Florida’s retirees.’
DeSantis declared that with the proposal, “we are protecting Floridians from woke capital and asserting the authority of our constitutional system over ideological corporate power”.
Leaving the US ‘culture wars’ to one side, what is the impact of all this?
To date, it seems, not a whole lot. Despite all the aggressive rhetoric, it seems that there is a fair degree of wiggle room within the Texas law around fiduciary duties and responsibilities. For instance, a state pension fund does not have to avoid firms and funds if the requirement to do so would be inconsistent with its fiduciary duties and responsibilities.
Moreover, the reality is that most of the big asset managers have not ‘boycotted’ fossil fuels at all yet, but rather are gradually reducing their exposure to them over time – and that can reasonably be presented as well-within their fiduciary duties and responsibilities – as opposed to acting “without an ordinary purpose”, as the Texas law states.
As such, it’s unclear whether these laws really stand up in practice, and in an interview with The Intelligencer (New York Magazine), Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis, suggested they might not stand up in court either.
“You’re bringing a social cost — the survival of fossil fuels — into the investment process, because left to their own devices the markets would be choosing other than fossil fuels. You’re asking them to perform financial malpractice”, Sanzillo suggested.
And a recent Wharton paper suggests that the biggest costs will rebound upon the ‘red states’ themselves – amid weaker competition and higher borrowing costs.
Using the example of the Texas law, the authors suggested that “if economies around the world that are heavily reliant on fossil fuels attempt to undo ESG policies by imposing restrictions on the financial sector, local borrowers are likely to face significant adverse consequences such as decreased credit access and poor financial markets outcomes”.
In other words, huge (and globalised) market forces are already driving the transition from ‘brown’ to ‘light green’ to ‘dark green’, and while municipal, state or even federal government authorities in the US or elsewhere might look to blunt or slow these forces, the dynamic is already well in motion.