Republicans aren’t done attacking ESG investing. Far from it.
Sixteen states — all led by GOP-controlled legislatures, and some with Democratic governors — passed laws this year aimed at restricting the investing strategy that screens for environmental, social and governance (ESG) risks such as long-term climate impacts. That’s according to a new report by Pleiades Strategy, an environmental group.
The new laws took several forms, from a measure in Kansas that would prevent public pension funds from using ESG principles, to another in Texas that prohibits insurers from doing the same. Utah alone has passed multiple ESG-related laws, one of which prohibits state and local government contracts with financial firms accused of “boycotting” industries such as fossil fuels and firearms.
But even as anti-ESG efforts advanced in statehouses across the country, so too did opposition to that approach. In most cases, aggressive anti-ESG measures were either defeated or watered-down — oftentimes amid intense opposition from pension managers, banking associations and other business groups.
The result is a patchwork of state laws that has helped fuel the culture war against ESG investing, increased the risk for taxpayers and retirees, and hampered efforts by the financial sector to address climate change.
And with a heated 2024 presidential campaign underway, observers say they don’t see the wave of anti-ESG measures receding anytime soon.
“A coordinated political effort is winning over a significant minority of states to do something that seems to be financially harmful,” said Witold Henisz, a vice dean and faculty director of the University of Pennsylvania’s ESG Initiative.
And it’s happening, he said, despite a “remarkable lack of interest” from investors and shareholders.
Henisz added that he expects anti-ESG efforts to remain an “active political issue” that ultimately would hurt the people in the states in which they pass.
“There will be harm caused to the pensioners … harm caused to the residents of the state to realize this political objective,” Henisz said.
Model bills set the stage
The proliferation of anti-ESG laws isn’t entirely homegrown.
Lawmakers from Alabama to Utah are drawing on the same suite of model anti-ESG bills circulating among conservative groups, according to the Pleiades Strategy report.
Those right-leaning groups include the Texas Public Policy Foundation, Opportunity Solutions Project, American Legislative Exchange Council and Heritage Foundation. Conservative advocates often have been close at hand when lawmakers consider anti-ESG bills.
At a Kansas House hearing in March, the only member of the public to testify in support of an anti-ESG bill was Joel Griffith, a visiting fellow at the Opportunity Solutions Project.
Later that month, another visiting fellow with the Opportunity Solutions Project, Chase Martin, testified to a Texas Senate panel about S.B. 1060, a bill that would restrict ESG-related shareholder proposals at insurance companies.
He sat shoulder to shoulder with Brent Bennett, policy director for the Texas Public Policy Foundation’s energy initiative, Life:Powered.
“We think it’s an amazing bill that will help to essentially push back against discrimination of Texas companies and Texas oil and gas,” Martin told lawmakers. “This bill is necessary and timely, and thank you for hearing it.”
Model bills are nothing new. But they’ve become especially influential in the ESG fight, according to the report, because the issue is so technical.
“This continues to be a topic lawmakers know little about,” the report said. “As we saw in legislatures around the country, in some cases, even bill sponsors do not know how to defend the bills they introduced.”
In at least one case, a bill co-sponsor raised concerns with his own legislation — only to be told that it was in line with efforts by others states.
State Sen. Bryan King, a Republican from northwestern Arkansas, said fighting ESG was long overdue. But he’d grown concerned about how the measure would empower just two officials — the attorney general and the treasurer — to blacklist Wall Street firms for ESG work.
“That seems like a lot of responsibility and a lot of power,” he said at a February hearing.
The bill’s other sponsors reassured him that Arkansas wasn’t experimenting with anything new.
“You know the old saying ‘don’t reinvent the wheel’ — we looked at some of the other states, and our bill pretty much mimics the West Virginia bill,” said Republican state Rep. Jeff Wardlaw, referring to legislation West Virginia lawmakers passed last year.
The Arkansas measure was signed into law in March.
In total, 19 new anti-ESG laws passed this year out of 165 distinct bills that were introduced, according to Pleiades Strategy. Three other bills await governors’ actions after passing their state legislature, and another 12 remain pending before lawmakers.
The bills that passed revolved around three general themes — though some pieces of legislation mixed and matched among the types.
One category of laws blocks public entities from doing business with firms deemed to be “boycotting” or “discriminating” against fossil fuels or other sectors. At least six states passed those kinds of laws this year, according to Pleiades Strategy.
Another category aims to keep ESG factors out of state pension decisions. At least nine states passed those kinds of laws, according to the report.
Finally, at least four states passed laws against using ESG “scores” in business decisions. Texas, for instance, restricted insurance companies from considering ESG criteria when writing policies or setting rates.
Opposition to anti-ESG efforts
Though popular among Republican officials, the spread of anti-ESG legislation attracted its fair share of opposition too — which often forced its supporters to abandon the effort or water down the impact.
Kansas lawmakers, for instance, dropped what initially was one of the strongest anti-ESG bills in recent memory — estimated to cost the Kansas Public Employee Retirement System about $3.6 billion over a decade.
They instead passed legislation restricting ESG considerations in the state’s investment and contracting decisions; that was estimated to cost the state $915,000. Democratic Gov. Laura Kelly allowed it to become law without her signature.
During the debate, a lobbyist for Kansas teachers warned that lawmakers were playing with financial forces that could harm real people.
“Oftentimes, the Legislature’s biggest blunders have come when we’re trying to placate legislators with bad ideas — you know, a little hearing here, a little do-nothing bill there,” Tim Graham of the Kansas National Education Association told a House hearing in March. “It’s a recipe for unintended consequences.”
“I hate to sound provocative,” he added. “But when it comes to our pensions, keep your culture wars out of them.”
That kind of pushback has emerged as a counterweight to anti-ESG efforts, advocates and experts said, especially in the absence of a coordinated nationwide response from the financial sector.
As a result, even though a bulk of anti-ESG legislation can be traced to model bills, the final laws that emerged over the past year had a distinct local flair — the result of case-by-case compromises among ad hoc coalitions in individual states.
In other words, the laws are just different enough to prevent Wall Street from taking a common approach to all the anti-ESG states, said Leah Malone, a partner at Simpson, Thacher & Bartlett LLP.
“The laws are all so bespoke and different from one another,” she said. “It’s very hard to put them under the same umbrella, other than the fact that they’re motivated by a similar sentiment.”
That uneven landscape, she added, makes it difficult to anticipate what comes next.
“The details in these laws have a very significant impact,” said Malone, who leads her firm’s ESG practice. “Which is part of the challenge here — every single one of these laws needs its own analysis.”
Impact on investors, retirees
Anti-ESG legislation is having a real effect on taxpayers and retirees, experts say.
In recent months, multiple analyses by state financial officials and outside academics have warned that anti-ESG legislation could have — or in some cases already is having — negative financial consequences.
Take, for instance, a Texas law that bans municipalities from banking with ESG policies related to fossil fuels and firearms.
When researchers at the University of Pennsylvania and the Federal Reserve Bank of Chicago analyzed the impact of the law on the municipal bond market, they found it prompted five of the state’s largest underwriters to exit the market. That decreased local competition for borrowing and boosted increased rates, costing taxpayers an additional $302 million to $532 million in interest over eight months.
Another example: Stillwater, Okla., which is subject to a similar boycott law.
The Stillwater City Council in April voted to borrow money from Bank of America for a major infrastructure project. But the next month, the state treasurer added Bank of America to a blacklist of finance firms he said were boycotting fossil fuels.
The move forced the city to find a new financier, which ended up providing a higher interest rate that ultimately generated nearly $1.2 million in additional costs, The Oklahoman reported.
The effect of anti-ESG legislation on public pensions also has drawn scrutiny.
Indiana lawmakers introduced a bill that sought to block the state’s public pension retirement system and the Indiana State Police Pension Trust from considering ESG factors while investing.
It wasn’t long before the state’s Office of Fiscal and Management Analysis released a fiscal impact statement that said that legislation could spur $6.7 billion in losses over the next 10 years for the public retirement system — sparking opposition from groups including the Indiana Chamber of Commerce.
That prompted lawmakers to significantly amend the bill, which they passed in April, in an aim to reduce its potential impact. But observers say the back and forth is just one example of how political intervention in financial markets can go awry — affecting communities across the country.
“The early evidence suggests that states that have adopted this legislation are facing … higher fees, and higher costs of raising capital or municipal bonds,” said David Webber, a Boston University law professor who focuses on ESG issues.
‘A drag on the financial industry’
Taxpayers and future retirees aren’t the only ones impacted.
The legislative push also is affecting the pension plans, investment managers and other financial entities charged with managing billions of dollars on others’ behalf — but now find themselves in the middle of an intense debate over whether they should consider issues like climate change while doing so.
Jennifer Schulp, who directs financial regulation studies at the Cato Institute, a libertarian think tank, is among those who said the patchwork of legislation is creating an increasingly difficult business environment.
“You have a situation where as a financial services firm … you are pretty unlikely to satisfy all 50 states,” said Schulp. “From a financial services standpoint, it’s an expensive distraction. Over the long haul, I think [anti-ESG] is a drag on the financial industry as the costs of doing business are raised.”
Compliance challenges aren’t limited to states. Webber of Boston University said he’s more concerned that most state-level anti-ESG laws contradict federal policy.
While anti-ESG laws, for instance, say climate-related information is not material to financial performance, and therefore should not be considered by pension plans and other financial firms, the U.S. Supreme Court has defined “materiality” as any information that would be of interest to the “reasonable investor.”
Investors, for their part, for years have clamored for more and better ESG-related information.
“They have created conflicting legal applications, such that to follow state law could be violating federal law, and to follow federal law could be violating state law,” Webber said. “That’s the liability trap.”
It’s all forcing financial entities to tread lightly to ensure they’re complying with the law, minimizing legal risk and not drawing too much attention to themselves via splashy climate promises.
“I think the movement is having an absolute effect in terms of chilling speech, chilling discourse,” said Henisz. “Given where we are in the climate crisis, that’s a real problem.”
“I expect it to continue to be ongoing through the 2024 elections,” he added. “The majority of the Republican presidential candidates have come out very strongly against ESG.”
