Republican activists and politicians like former Vice President Mike Pence and Florida Gov. Ron DeSantis have been working overtime to alert America to the dangers of ESG. Red state legislators are pushing dozens of bills this year to restrict the use of ESG by the fiduciaries responsible for state investments, like pension plans, while some are even proposing an outright ban on ESG investing and data. The Republican majority in the U.S. House of Representatives is planning to use its oversight function to investigate the ESG practices of asset managers and the perceived pro-ESG views of the Securities and Exchange Commission. And Republican politicians are placing ESG on the list of grievances and conspiracies they serve up to their base as they try to turn ESG into the next critical race theory (CRT). One activist who was instrumental in convincing the Republican base that CRT is an ominous threat to their existence is heavily involved in the anti-ESG effort.

Although ESG technically refers to data about environmental, social and corporate governance issues that are material to a business, ESG is being used by the Right to refer to the supposed threat posed by the trend of investors and corporations adopting more sustainable and responsible practices. Using a set of initials that few people know the meaning of, rather than positively valanced terms like “sustainable” and “responsible” makes it easier for the Right to demonize something that is widely popular.

Most people think large corporations should take action to limit their carbon emissions and position their businesses to thrive in a low-carbon economy. Most people also think corporations should treat their workers better and that companies should not be run by only white men and only for the benefit of shareholders. This is the essence of the ESG that the Right is railing against.

These things all threaten the Right’s worldview. Its undying support for and the funding it receives from the oil and gas industry fuels its refusal to combat climate change. Texas passed a law in 2021 prohibiting asset managers and banks that consider ESG and climate risk from doing business with state entities. The law tries to force investors to continue investing in the fossil-fuel industry regardless of whether they believe it to be prudent. It costs real money to run a protection racket: A Wharton School study estimated that the cost of this fossil fuel protectionism has already cost the state as much as $500 million.

Anti-ESG legislation has started to trigger its own backlash from bankers and investment professionals. They argue that investment decisions, especially those made on behalf of worker pension plans, should be made by professionals guided by fiduciary duty and not by politicians guided by ideology. Putting investment decisions in the hands of politicians is a recipe for poor investment outcomes; in this case, it’s also a recipe for poor outcomes for people and the planet. The anti-ESG forces haven’t achieved much substantive success yet, but funded by unlimited dark money and with the 2024 presidential primary season coming up they’re unlikely to fold up and go away anytime soon.

Jon Hale
Director, ESG Strategy Morningstar