States Fight ESG Industry, Despite Costs and Long Odds
Boycotts, bans and antitrust actions are ‘being effective,’ state treasurers say
As conservative states push back against the progressive agenda of Wall Street banks and asset managers, some analysts are warning that “anti-ESG” states will pay a price for taking on Wall Street and the ESG industry.
North Carolina State Treasurer Dale Folwell has enacted several measures, including calling on Larry Fink, CEO of BlackRock, the world’s largest asset manager, to resign over what Folwell says is the company’s excessive focus on controversial political causes.
“Why am I spending time on this drama when all I hired this person to do was manage and make us money?” Folwell said. He told The Epoch Times that North Carolina is both a client of BlackRock, having hired them as an investment manager, and a shareholder, owning $55 million of BlackRock shares.
Folwell has also taken back the state’s proxy votes, its rights to vote on the corporate shares it owns, from BlackRock “so that [Fink] can no longer politicize our North Carolina money,” he said. Some of the state’s investments managed by BlackRock are longer dated and cannot be moved to another firm overnight, but Folwell negotiated lower management fees on the funds that remain with BlackRock.
Like BlackRock, many of the world’s largest banks and asset managers have become advocates for the Environmental, Social and Governance (ESG) movement, which calls for financial institutions to use their power to compel companies to get in line behind issues like climate change and social justice.
ESG Conflict Heats Up
State efforts for and against ESG have been heating up recently. In 2023 so far, conservative states have proposed 99 anti-ESG bills, compared with 39 in 2022. Seven became law, 20 failed to pass, and 72 are still pending. At the same time, left-leaning states like New York, California, and Illinois are fighting back to support the ESG industry.
New York City Comptroller Brad Lander wrote in a letter to Fink that “your 2021 letter to CEOs committed to ‘supporting the goal of net zero greenhouse gas emissions by 2050 or sooner’—in line with BlackRock’s pledge as a signatory to the Net Zero Asset Managers Initiative (NZAMI)—and asked businesses to disclose how they are integrating their own net zero plans into their long-term business strategies.”
“Unfortunately, despite these repeated proclamations … BlackRock now abdicates responsibility for driving net zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets,” Lander stated.
He suggested that BlackRock could lose the business of New York City’s pension funds if it falters in its support for ESG goals and that he would be “reassessing our business relationships with all of our asset managers, including BlackRock, through the lens of our climate responsibilities.”
At the same time, some say that red states should think twice about fighting ESG.
A report last month by Institutional Investor states that “state pension funds or other powerful players in at least five Republican-controlled states say that instead of creating excellence, these new culture-war policies are interfering with the market and could cost pensioners and taxpayers billions of dollars.”
A Wharton Business School study estimated that, after Texas passed laws boycotting banks that it deemed to be discriminating against fossil fuels, “cities will pay an additional $303 million to $532 million in interest on $32 billion in bonds” during the first eight months after the law went into effect. The study inferred that eliminating the largest U.S. banks from underwriting Texas’s municipal debt caused the cost of issuance to rise.
A report by Standard & Poors, a rating agency that also provides ESG ratings, cites a study by As You Sow and Ceres, investor advocacy groups that support the ESG movement, that predicts that six other states that are considering enacting laws like those in Texas could face up to $708 million in higher borrowing costs.
“On Feb. 1, the North Dakota House of Representatives — where Republicans hold a supermajority — voted down legislation that directed the state treasurer to boycott investment firms over their ESG policies,” the report stated. “One week later, the board of trustees overseeing Kentucky’s $7.9 billion County Employees Retirement System bucked a recent decree by State Treasurer Allison Ball to divest from BlackRock Inc. and other investment firms over their fossil fuels policies.”
But in some states, this doesn’t reflect their experience.
States Find Ways to Cope
Florida, which shifted $2 billion away from BlackRock in December 2022, has felt “no ill effects,” Florida Chief Financial Officer Jimmy Patronis told The Epoch Times. “When the team started looking at the performance of our short-term fund managers,” Patronis said, “BlackRock has really performed at the middle of the pack.”
According to Folwell, North Carolina has reduced its state debt to the point that “we’re not issuing debt; we’re actually investing money in things that earn higher rates of interest,” he said. This has reduced his state’s dependence on Wall Street underwriters for its bonds, but not all states are in this position.
“It’s much easier to replace an investment manager, and that happens all the time in the regular course of business,” Utah State Treasurer Marlo Oaks told The Epoch Times. “On the banking side, it’s more challenging; that’s where you’ve seen the consolidation of so much power in the hands of such a small group of banks.
“We’re now seeing why that’s a problem, because it’s reducing the competition and the ability to serve the market in a capitalistic way,” Oaks said. As a result, as Utah works to shift business away from left-wing financial institutions, it has built flexibility into its laws to allow banking relationships to continue if terminating them would harm the state.
ESG Hurts the Poor Most, Critics Say
Many state officials say the consequences of ESG on their communities include shortages, inflation, and a decline in living standards, especially for the poor.
“I just had a deep conversation with [ESG rating agencies] Moody’s, Fitch and Standard & Poors about this,” Folwell said. “They come into these small communities who are having a difficult time making their pension or their health care payments, and having a difficult time keeping their water and sewer systems solvent, and they say: ‘How many electric vehicles do you have?’”
“When you have this activism, investors trying to force higher costs for energy conversion by forcing wind or forcing solar into the mix, it’s on the backs of somebody who can least afford it,” Patronis said.
On the charge that fighting ESG is “interfering with the market,” the Democratic party has recently taken an uncharacteristically pro-corporate stand against political influence.
In a Wall Street Journal op-ed titled “Republicans Ought to Be All for ESG,” Senate Majority Leader Chuck Schumer (D-N.Y.) claimed that “America’s most successful asset managers and financial institutions have used ESG factors to minimize risk and maximize their clients’ returns.”
“Republicans talk about their love of the free market, small government and letting the private sector do its work,” Schumer wrote. “But their obsession with eliminating ESG would do the opposite, forcing their own views down the throats of every company and investor.”
In a February interview, however, Vanguard CEO Tim Buckley stated: “Our research indicates that ESG investing does not have any advantage over broad-based investing.” Vanguard is the world’s second-largest asset manager.
Many state officials say ESG is not “the market,” but a version of central planning that is a far cry from the free exchange of goods, capital, and labor.
Rather than interfering with markets, Oaks said, “I think we are interfering in the collusion that’s happening in the marketplace. You’re seeing collusion in the form of these financial alliances like the Glasgow Financial Alliance for Net Zero and all of the verticals underneath it. When you say all actors have to adopt this, that’s not the market.”
According to Oaks, many people confuse ESG with what was formerly called socially responsible investing or investing in companies that support particular values. ESG, by contrast, is a buy-and-hold strategy in which large institutional investors purchase shares in companies and then control how they are run. He cites the case of Exxon Mobile, in which activist asset manager Engine No. 1 was able, with the support of institutions like BlackRock and California pension funds, to put climate activists on Exxon’s board with the goal of reducing oil production.
“That was a group of institutional investors pushing their agenda onto a company, which impacts the entire marketplace and has serious ramifications for all of us,” Oaks said. “You’re substituting our pluralistic marketplace for centralized control.”
Too Big to Resist?
Some have argued that asset managers like BlackRock, Vanguard and State Street are so large, each with trillions of dollars of assets under management, that states with only tens or hundreds of billions to invest will have little influence over them, and will suffer for attempting to defy them. But state officials say they are scoring points regardless.
“I’ve met half a dozen treasurers that in the last couple of months talk about personal meetings with Larry Fink,” Patronis said. “I’m sure [BlackRock] are doing their own damage control based on what Florida did.
“We made them feel a little self-conscious,” he said. “I feel like that’s a win.”
In December 2022, Vanguard pulled out of the Net Zero Asset Managers initiative, a coalition of 301 asset managers committed to using their share ownership to compel companies to enact ESG-friendly policies.
“We don’t believe that we should dictate company strategy,” said CEO Tim Buckley following the announcement.
“I’m going to be very interested to see how Vanguard votes their shares,” Oaks said. “In this proxy season, they went from 21 percent support for ESG down to 8 percent.”
In March, several insurance companies pulled out of the U.N.-backed Net-Zero Insurance Alliance (NZIA), including Munich Re, Zurich Re, and Hanover Re. The founding members of NZIA, Allianz, and Swiss Re said they are “monitoring developments” regarding whether or not they will stay in the alliance.
“In our view, the opportunities to pursue decarbonisation goals in a collective approach among insurers worldwide without exposing ourselves to material antitrust risks are so limited that it is more effective to pursue our climate ambition to reduce global warming individually,” Joachim Wenning, CEO of Munich Re, stated.
Antitrust Actions May Be Looming
The issue that Wenning raised regarding the risk of antitrust actions may also be coming to the fore this year. In December, GOP House Representatives launched an antitrust investigation that included progressive activist organizations like Climate Action 100, which Republicans charged “seems to work like a cartel.”
“Woke corporations are collectively adopting and imposing progressive policy goals that American consumers do not want or do not need,” the letter stated. “When companies agree to work together to punish disfavored views or industries, or to otherwise advance environmental, social, and governance (ESG) goals, this coordinated behavior may violate the antitrust laws and harm American consumers.”
“The thing that really makes me laugh out loud is when I hear that the majority of people want ESG,” Derek Kreifels, CEO of the State Financial Officers Foundation (SFOF), told The Epoch Times. “We’ve got more than half the country on our side.” The SFOF, an organization of state treasurers that generally opposes ESG, includes 35 state officials from 28 states, with combined assets of nearly $3 trillion.
Even as the divide between conservatives and progressives grows wider, it also presents an opportunity for “companies that want to come in and just do their duty to shareholders, banks that want to be banks, fund managers that—shocker!—want to just bring the best return for investment,” Kreifels said.
“The companies that are doing that, they’re the ones that all the people want to talk to right now,” he said. “There is an exodus happening, maybe not en masse yet, but there is an impact.”
“ESG is really an effort to push a political agenda through the capital markets, and those whose agenda is being exposed are saying, ‘Oh, you’re harming yourselves by exposing us,’” Oaks said. “To me, that says we’re being effective.”
