The backlash of ESG investments | Kiplinger

Divestment from ESG

Over the past two decades, the financial community has broadly accepted that environmental, social and governance (ESG) factors can affect a company’s profitability and equity performance. Over the past year, however, some governors have politicized ESG investments, calling them “woken up” and banning this style of investing from their state pension funds. Culture wars appear to be coming to invest.

Why the sudden ESG backlash?

The US economy is on the road to a major transformation, fueled less by fossil fuels and more by climate-friendly energy sources such as wind and solar. The fossil fuel industry may publicly acknowledge the need to reduce greenhouse gas emissions to mitigate climate change, but the industry remains resilient behind the scenes. As a result, ESG investors have pushed the industry to release more concrete data on how it will manage this transformation. This effort culminated in draft requirements for public companies to report more broadly on their greenhouse gas emissions with the Securities and Exchange Commission. Citing issues such as the cost of extra reporting, attorneys general of 21 red states wrote comments in August to protest the draft rule.

A second reason for the backlash is the success of the shareholders’ resolutions targeting companies with poor climate change and diversity reporting or performance. These gains galvanized opposition from ESG investors.

If it seems that the anti-ESG effort has suddenly sprung up in an organized way, that’s because it is. An investigative report found that the State Financial Officers Foundation (SFOF), dark money groups, ALEC, the Heritage Foundation, and others were orchestrating the bans. A dark money group called Consumers’ Research he’s handling the messaging and appears to be raising money for the campaign.

ESG bans in 2021 focused primarily on fossil fuels, but branched out to cover other “awakened” business issues such as gun control, abortion travel reimbursement, diversity training, and others.

Republicans aim to take ESG bans from states to the federal arena if they win both chambers in November.

State ESG bans

Many states with Republican governors have embraced ESG investment bans in pension funds, as well as bans on major companies offering ESG investments. Some states target funds that limit or exclude investments in the fossil fuel sector, others in firearms, and some exclude any type of ESG investment. A number of states are also being targeted Black rock (BLK), the largest global investor and advocate of ESG investments. These states include: Texas, Florida, West Virginia, North Dakota, Oklahoma, Minnesota, Idaho, South Carolina, Louisiana, Idaho, Wyoming, Arizona, Kentucky, Utah, Indiana, Missouri, Ohio, and South Dakota. Some of these states may also adopt broader ESG bans.

Texas recently enacted one of the most radical ESG bans. The state is removing 348 funds from state pensions, including those offered by traditional companies such as Loyalty, State Street (STT) And Avant-garde. Texas is also blacklisted BlackRock, UBS Group (UBS) and eight other companies under contracts with state and local authorities.

According to Republican state Senator Phil King, the ban “sends a strong message to both Washington and Wall Street that if you boycott Texas Energy, Texas will boycott you.”

Companies like BlackRock protest that they are hardly boycotting the Texas oil and gas industry. In a company statement, BlackRock said it “does not boycott fossil fuels – investing over $ 100 billion in Texas energy companies on behalf of our customers proves it.” The company also manages billions of dollars in Texas infrastructure and other bonds.

Big banks, like JPMorgan Chase (JPM), Goldman Sachs (GS) And Bank of America (BAC) it was also forbidden to subscribe to the municipal bond market. This move has raised the cost of borrowing for municipal bonds, as there are fewer large banks competing to be underwriters. According to a study by a Wharton School researcher, “Texas taxpayers can expect it [anti-ESG] bills to cost them about $ 445 million per year in additional loan costs. If more banks leave, these costs will increase. ”

West Virginia it is also denying contracts to banks that support ESG. Five banks are banned from doing business in the state due to their public support for phasing out coal-based energy. As in Texas, this approach is likely to increase the cost of borrowing for municipal projects.

Florida it also passed a similar bill to remove ESG funds from its $ 168 billion retirement plan.

Funds and anti-ESG ETFs

There has been a flood of new investment products linked to anti-ESG rhetoric. Most have yet to be launched or have not been able to grow significantly. An exception is the To strive US Energy ETFs (DRLL), launched in August and which already boasts nearly $ 316 million in assets under management. ETF manager Strive Asset Management was founded in 2022 and backed by billionaire investors Peter Thiel and Bill Ackman to offer anti-ESG ETFs and shareholder advocacy. The company recently filed for four additional index ETFs.

Strive Asset Management is planning to adopt Engine # 1 strategy. 1: Buying companies for the purpose of creating shareholder proposals and lobbying for shareholder votes, but from an anti-ESG perspective. While the company can successfully grow and attract investors, it is unlikely to really affect proxy voting counts given the trillions of dollars that have recently backed the ESG proposals. Additionally, impartial proxy voting firms such as ISS and Glass Lewis, which advise investors on how to vote their proxies on shareholder resolutions, have for years considered many financially relevant ESG factors.

How will the ESG backlash affect investors?

It seems unlikely that the backlash will have a major impact on Wall Street. ESG investing has recently lost momentum, but overall the investment strategy remains extremely popular, with 85% of investors interested in ESG products.

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