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An illustration in a rusty orange color shows the outline of a businessman in suit and tie looking at a piece of paper; behind him are the letters “ESG.” Amanda Northrop/Vox

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The weird Republican turn against corporate social responsibility

Companies say they want to acknowledge environmental impacts. Republicans are mad about that.

Rebecca Leber is a senior reporter covering climate change for Vox. She was previously an environmental reporter at Mother Jones, Grist, and the New Republic. Rebecca also serves on the board of the Society of Environmental Journalists.

Republicans have found a new front in the culture war. For months, Republicans have been attacking ESG, the financial shorthand for how some companies consider all the ways the environment, social issues, and corporate governance impact their bottom line. One of the GOP’s recent targets is BlackRock, the world’s largest asset manager, which oversees some $8 trillion in assets, as a symbol of the financial community’s growing recognition that climate change is too big to ignore.

Republican leaders call the business world’s recognition of climate science a symptom of “wokeism.” In a white paper released this week, the Republican minority on the Senate Committee on Banking, Housing, and Urban Affairs recently called out the “big three” firms BlackRock, Vanguard, and States Street “as our new emperors,” taking issue with their involvement in a non-binding coalition that supports reaching a portfolio of net-zero emissions by 2050.

“The conclusions are built on flawed premises and risk harming millions of everyday investors that rely on mutual funds and exchange-traded funds to help them retire with dignity,” BlackRock said in response to the GOP’s report.

ESG may be the right’s new boogeyman, but it’s a misunderstood concept that has been around for a long time; in 2004, the UN secretary-general challenged financial institutions to better account for environmental, social, and corporate governance issues. But ESG gained visibility in the past few years, especially after BlackRock CEO Larry Fink penned a letter to CEOs in 2021 urging ESG as the future.

ESG is not a regulation or a set of rules, and it does not require any real action from a corporation. It’s mostly used as a catch-all term for any investment that considers social and environmental responsibility. In fact, what counts as ESG is so ill-defined and malleable it has been criticized as a way to “greenwash” corporate actions.

One of the defining ideas of ESG is that a company is better off accounting and reporting environmental and social risks to investors and clients, rather than being willfully blind to the world around it. This can include a broad swath of issues, such as a company’s reliance on oil, gas, and coal, or exposure to sea-level rise in coastal operations, human rights violations of the countries it operates in, and lack of board diversity and CEO transparency. A big part of the ESG movement, at least right now, is largely about disclosure of these potential bottom-line risks in the future, not necessarily doing anything differently in the present.

But Republican officials in West Virginia, Texas, Louisiana, Missouri, and now Florida have withdrawn billions of dollars from BlackRock’s management. Proponents are planning to introduce a slew of bills in at least 15 states next year to divest pensions and boycott companies for considering sustainability as an aim. At the federal level, House GOP lawmakers are preparing antitrust investigations.

To get to the bottom of what is driving this, I spoke to one of the state officials leading the attack on ESG, Riley Moore, state treasurer of West Virginia. The way he sees it, “banks are coercing capital away” from coal, gas, and oil industries. He explains he doesn’t want the coal- and gas-reliant state to contract its financial services with a company that is “trying to diminish those dollars. They want less coal mining, they want less fracking.”

This is getting much bigger than BlackRock, State Street, and Vanguard, companies that used to be solidly at the right of corporate America. There are real stakes for pensioners, red-state taxpayers, and the wider economy if the GOP succeeds in scaring off financial institutions from pursuing climate targets.

ESG isn’t woke, but it is evidence of the free market at work

The backlash began early in 2021 when three events sent the signal that ESG was here to stay. The first was Larry Fink’s embrace of ESG, noting in his 2021 letter that “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.” The second came in March, when the Biden administration proposed a regulation to require climate risk disclosure from publicly traded companies, parallel to rules being adopted by the European Union. The third and final was an unlikely coup staged at the annual Exxon shareholder board meeting.

Last year, Engine No. 1, a small hedge fund, earned enough votes to gain three Exxon board seats, despite the company’s recommendation against it. It wouldn’t have been possible without the support of Exxon’s three largest shareholders, BlackRock, Vanguard, and State Street voting, representing 20 percent of the voting share. The new board members’ mission was focused on understanding the risks climate change and regulation will pose to the company.

The win was the clearest sign yet that there was a realignment happening in financial markets and that even the fossil fuel industry couldn’t ignore the effects of climate change. Investors, as the Engine No. 1 win showed, are already clamoring for this kind of information. The assets BlackRock handles far outnumber what Republicans could divest. For example, two-thirds of BlackRock’s largest clients in its strategic partner program, representing assets over $3 trillion, support the energy transition, according to BlackRock. ESG isn’t going away — by 2025, global ESG assets are expected to make up a third of all projected assets under management — and it keeps growing. ESG funds are also now packaged for retail use, like for retirement savings.

On the left, ESG has for years come under criticism as a form of greenwashing, and ESG disclosure isn’t the same thing as corporate behavior. As Harvard Business Review noted, the funding in ESG is “dedicated to assuring returns for shareholders, not delivering positive planetary impact.” Many environmentalists think ESG is a distraction from the main issue they’d like to see traction on: companies disclosing the impact their products and investments have on the world around them, and accounting for that in decisions.

ESG doesn’t go this far. In no way will disclosure be enough to save the planet from climate change. There are no binding requirements, either. But what Republican critics of ESG really fear is that the financial world will realign with climate science and no longer see new coal plants and offshore drilling as viable projects to finance.

Many of the Republican attacks on ESG stem from a misrepresentation of what it actually means. It’s not always motivated by an altruistic climate or social agenda. ESG also helps banks and public companies meet their one goal by screening investments for various risks. “They’ve got a fiduciary duty to generate returns. So they’re not going to impose some agenda, whether it’s climate or social agenda, that’s going to get in the way of returns,” said University of Oxford business expert Robert Eccles.

As baseless as the attacks have been, the pressure could still work. Vanguard on Wednesday announced it is withdrawing from the Net Zero Asset Managers coalition, in which companies voluntarily committed to reaching net-zero emissions in their portfolios by 2050. In an apparent nod to the ongoing GOP’s investigations, Vanguard said it withdrew “so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to our investors.”

The right’s baffling one-year campaign against ESG

After Engine No. 1’s coup, the attacks started to crystallize from the right, spearheaded by conservative advocacy circles. There have been two groups at the center of these attacks, both supported by the Federalist Society’s Leonard Leo, who led the right’s legal strategy to overturn Roe v. Wade. Those groups, Consumers Research and State Financial Officers Foundation, are conservative nonprofits also funded by groups with anonymous funding.

These groups’ involvement suggests a deep-pocketed campaign. “This is an artificially created conversation topic that’s not being led by financial stakeholders. It’s political stakeholders that are driving this forward,” said Jacey Bingler, senior communications campaigner of the climate finance advocacy group Sunrise Project.

There have been four main prongs to the right’s strategy. Republicans plan to undertake antitrust investigations next year at the state and federal levels against these giant corporations. Just before the election, Senate Republicans sent a letter to top law firms warning of investigations around ESG, claiming they suspect collusion. The second is what states like West Virginia and Florida have already done: pulling their state operating funds from BlackRock and other banks’ management.

The final two prongs are considered potentially the most damaging to taxpayers and pensioners in red states. One is the model bill that is circulating in red states, called the State Government Employee Retirement Protection Act. It divests teachers, police officers, state-employed nurses, and other employees’ pensions from companies that are on a boycott list. Eventually, experts worry this ban could mean the pensions are overweighted in fossil fuels and less diverse, leaving the people depending on their retirement subject to more market volatility.

The final tactic is a boycott list, where the state only seeks contracts with financing from companies that do not consider climate change in their calculations. Practically speaking, that means if a state wants to build a highway and needs financing, it could wind up being charged higher fees because there is less need for those banks to compete with better deals.

The ESG backlash is an extension of the right’s ideological schism on climate change

It’s not clear what’s motivating this new front in the GOP’s culture wars. It’s not a winning political issue, given that most voters aren’t familiar with terms like ESG, nor is ESG a top priority of the climate movement.

There’s another theory, though. “It’s intended to delay climate action without having to admit that that’s what they’re attempting to do,” Sunrise’s Bingler said. “Republicans have essentially created a new installment in this culture war where they tend to pick relatively niche topics that don’t necessarily resonate with large parts of society without this artificial attempt to continue to fan the flames.”

For over a decade, the main plank of the GOP has ignored climate science, cycling through various excuses not to take action on greenhouse gas emissions. Most of the electorate thinks climate change is real and is concerned to some degree about it, and rising extreme weather is making it more undeniable.

But many Republican leaders don’t recognize that science. West Virginia’s treasurer, Moore, is one of them.

“You’re talking about climate changing, you know, in 100 years,” he said. “I mean, these folks are hedging on what the climate might look like in 100 years. Tell me, exactly, for a pension beneficiary, who is going to retire in the next 10 years, how carbon emissions is going to affect the financial outcomes and vitality of a given publicly traded company.”

“So what you’re telling me is you’re going to have sea levels rise by X amount of centimeters in 100 years, and that somehow is going to affect the profitability of a company?” he continued. “Not sure I follow that.”

Climate activists — and even some investors — have said that the GOP pushback against ESG is a political issue, not primarily an economic one. There’s also no clear anti-ESG consensus among typical allies of Republicans; the Kentucky Bankers Association in November sued the state attorney general for overstepping his authority by demanding documents related to ESG.

So the issue’s salience in the next two years will depend entirely on how it resonates with voters and potentially factors into the presidential election. Many experts were skeptical it could ever gain political relevance, but still worry what the endgame is. Does this mean a future of “blue banks” and “red banks”? Will financial behemoths be frightened into weakening already-weak climate targets? It’s too early to say.

But the right’s war on banks won’t necessarily drive a back-pedaling on climate goals. BlackRock has tempered its interest in climate publicly since the ESG attacks began, but other institutions have pushed ahead.

“Market participants will continue to demand ESG data and incorporate it in risk models,” said Ivan Frishberg, chief sustainability officer of Amalgamated Bank, a bank with a socially responsible mission. “That is capitalism doing what it does best: seeking more data for better client responsiveness and a more systemic view. The pushback on ESG is essentially a denial of capitalism. Ultimately, our clients are going to drive the products and approaches we take and guide how we respond as a firm.”


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