Defending the freedom to invest

Across the US, the far-right has been mounting attacks on sound business practices as part of a campaign aimed at cracking down on investors’ freedom to manage risk . Much like critical race theory (CRT), fringe interest groups have been using “ESG” as a floating signifier – a catch-all grievance they can charge with meaning and misinformation to rally their base. This approach of restricting investor choice has shown not to be resonating with voters – especially Republicans – and yet the right-wing has been using it as justification to force continued investments in sectors that are facing obsolescence, such as fossil fuels.

In Texas and a number of other U.S. states, bills punishing financial institutions for ‘boycotting’ oil and gas companies have been introduced by state officials. Under the Texas bill, financial institutions are set to be excluded from conducting business with state municipalities should they “refuse to deal with, terminate business activities with, or otherwise take any action that is intended to limit commercial relations with” an oil and gas company. The fact that the financial institutions selected for this exit list are not actually boycotting fossil fuels did not stop Texas from banning them from doing business with the state.

The bills are already having a measurable negative impact – in Texas, the introduction of a bill caused five of the most significant municipal bond underwriters to exit the market, putting crucial funding for roadworks, schools and other projects for local communities in flux.

Outside of the U.S., European and Asian governments are implementing increasingly stringent net zero policies and initiatives through financial regulation and state policy. Examples include the EU’s Sustainable Finance Disclosure Regulation and carbon markets in place in China, South Korea, Japan and New Zealand. The direction the global industry is headed is clear, the transition to renewable energy sources is well underway. Global players, like BlackRock, Vanguard, and Citigroup, whose business and clientbase extend far beyond the borders of US red states, risk being left even further behind

Most of the public is in favour of defending freedom to invest

Even in the US, it is becoming increasingly clear that this fight is mostly taking place in an echo chamber. New Climate Power and Data for Progress polling found that a majority (57%) of voters have never heard about ESG investing and only 7% of voters have heard a lot about it.

The majority of voters (54%) “agree that financial managers should be allowed to consider environmental factors, such as climate risks or the riskiness of investing in fossil fuels, when making investment decisions for retirement funds.”

Centrist and business voices have been alarmed by the attacks on the freedom to invest prudently and are speaking up. This concern stretches across party lines – Republican NH Governor Sununu recently criticised anti-ESG measures as “anti-free market government overreach”.

Over recent weeks, many have voiced concerns about how banning investors’ ability to manage risk could threaten the financial security of local businesses, working families and the economy at large – where people’s retirement savings and tax dollars are being used as a political weapon against them.

Financial experts, industry associations and state representatives are rightfully concerned and should continue to push back against these politically motivated attacks.

ESG boycott bills fall flat

As anti-ESG sentiment has proven to be seriously out of touch with best business practices, there has been pushback from representatives across affected US states. A number of attempts to pass bills have failed, even in conservative strongholds. For example, in North Dakota, a Texas-style bill that would have required the state treasurer to prepare a blacklist of financial firms who are deemed to be ‘pushing liberal agendas’ was voted down 90-3.

Arizona then announced that it will no longer participate in investigations into banks and other financial institutions over ESG investing practices, according to a statement from the state’s new Attorney General, Kris Mayes.

This is mirrored in other strong action by financial groups and state actors. In Kentucky, the Kentucky Bankers Association is suing the KY Attorney General over the statesman’s efforts to enforce anti-ESG. The group argues this is undue surveillance and an infringement of their rights to free speech.

In her statement, Mayes, a Democrat elected in January, shared that “it is not the place of government to tell corporations and their investors that they cannot invest in sustainable technologies and practices or improve their governance processes.”

Conservative financial experts push back

While political and legislative leaders have vocally opposed or withdrawn support from highly political attacks on ESG investing, a number of leading financial voices have also highlighted the real risks associated with continuing to invest in fossil fuels.

Martin Tillier contextualised that while the Russian invasion of Ukraine and the resulting energy supply crisis have pushed oil and gas prices up, investors shouldn’t fall prey to the delusion that funds focused on maximising the potential of big oil companies are a good investment: “long-term this, like all ideologically-driven investments, is fundamentally flawed.”

The failure of U.S. crude output to compensate for that has reinforced the strategic importance of energy and the problems with restrictive regulations on oil and gas, even if you think they are a good thing.

Bold statements like this from financial leaders are essential to shifting the narrative, and ensure that institutional investors are not distracted from the global geopolitical context their investments are situated in.

Influential voices like Martin Tillier speaking out highlight the reality that shareholders want a prosperous future without the risk of stranded assets for themselves and their clients.

An important case in point for why financiers need to be able to limit their exposure to waning industries is the recent demise of coal conglomerate giant Adani. From alleged accounting fraud, to mistreatment of workers, to the stranded asset threat tied to its substantial coal mining business – the Adani conglomerate has shown to be a highly risky investment with a number of red flags. The colossal loss facing its shareholders should serve as a cautionary tale for how dangerous it can be to prevent investors from identifying and responding to risk prudently and swiftly.

What next?

Shareholders should be heartened to know that a fringe group of far-right politicians do not represent the majority. Slowly but surely, the cross-sector response to these attacks is consolidating into a united front, with President Biden expected to use his first veto to reject anti-ESG legislation that would have banned pension funds from taking risks – such as climate change – into account. This veto is a sign of solidarity with American workers whose pensions are at risk to be abused for the far-right’s dark money-funded culture war.

The facts are clear: Climate change is already exacting huge costs on communities, industry, government, and the wider economy. The financial industry doesn’t have the luxury to ignore climate risk. And working people do not have the luxury of seeing their lifetime savings gambled with.

Further reading

Check out our long read on why the anti-ESG attacks are a futile tactic in a losing battle
Bankers strike back on ESG – Politico
The backlash to the ESG backlash is here – Semafor
E.S.G. investing bans face red state backlash – NYT Dealbook
US state pension funds begin to pushback against fossil fuel divestment bills – Responsible Investor
Arizona drops support for anti-ESG Measures – ESG Today
North Dakota House Rejects Bill to Create ESG Boycott List – Pensions & Investments
Amid ESG backlash Kentucky pension fund says it will not divest BlackRock – Pensions & Investments
The Right Has It In for Woke Investors. The Only Problem? They Don’t Exist. – The New Republic