Rooting out ESG-based investing is proving to be more difficult than conservatives had figured, even in Republican-led states where early efforts to tame the practice have faltered.
State pension managers, banking associations and business groups in more than a half-dozen red states have sounded the alarm that bills to blacklist pro-ESG asset managers and investment funds from doing business with states — including their pensions — could cost retirees and hurt local banks.
Mississippi, North Dakota and Wyoming killed anti-ESG bills while Kansas and Indiana diluted proposals before passing them, per an ESG tracker from law firm Ropes & Gray and a Washington Times analysis.
Republicans in Arizona, Texas and Kentucky have also faced resistance from state and county money managers.
West Virginia Treasurer Riley Moore, a Republican and leading ESG critic, faced similar headwinds as he championed an anti-ESG bill. Recently signed into law, it prohibits state-managed funds from supporting ESG issues in the shareholder proxy voting process.
Mr. Moore suggested in an interview with The Times that the pushback stemmed from “fear-mongering” and outside influences.
“It was quite contentious here in West Virginia,” he said. “What I’m curious to know about all these pension fund managers in these state governments is what kind of conferences are they going to? Who are they talking to? Are they out there getting wined and dined by some of these big money managers?”
ESG — or environmental, social and corporate governance investing — is a practice of selecting certain investments because of their impact on climate or social justice reasons, rather than financial returns. Proponents say the practice considers financial impacts outside of regular monetary factors.
To many conservatives, it’s “woke capitalism.”
It’s also pervasive, including some of the world’s largest firms like BlackRock, Vanguard, Wells Fargo, JPMorgan Chase and State Street. And that means bills to blacklist practitioners leave limited options for states to invest pensions or other government funds.
Despite the setbacks, the anti-ESG movement has surged over the past year. Red states have pulled billions of dollars from pro-ESG investment corporations and banks.
President Biden was forced to issue his first veto last month against a GOP-led effort in Congress to scuttle a Labor Department rule allowing 401(k) fiduciaries to use ESG in everyday Americans’ retirement plans. Roughly a dozen Republican-controlled states have taken action discouraging ESG or blacklisting companies believed to be “boycotting” industries like fossil fuels and firearms, according to Ropes & Gray’s ESG tracker. Those include places like Florida, Texas, West Virginia, Idaho and Utah.
Wyoming, which defeated anti-ESG bills this year, passed a law in 2021 prohibiting financial institutions from discriminating against firearm-related businesses. A similar scenario unfolded in North Dakota, which tanked anti-ESG legislation this year but in 2021 passed a law to prohibit state pensions from making “social investments” unless shown they will perform as well or better than similar non-social investments.
Meanwhile, nearly a dozen blue states have taken action promoting ESG and divesting from similar industries.
A study published last year offered an early warning sign for potential unintended consequences of anti-ESG legislation.
The University of Pennsylvania’s Wharton business school and the Federal Reserve Board of Governors projected Texas will pay up to $532 million more in interest on $32 billion worth of loans during the span of eight months because of less market competition after it cut off business with banks that have anti-fossil-fuel policies or discriminate against gun makers.
In North Dakota, a Republican lawmaker who sponsored an anti-ESG bill ended up asking colleagues to tank it.
“This bill, while well-intended, had too many unintended consequences that would have hurt our own Bank of North Dakota and other main street banks that do support our state’s [agriculture] and energy businesses,” Rep. Mitch Ostlie said, according to S&P Global.
In Kentucky, the County Employees’ Retirement System told state Treasurer Allison Ball in February that the group could not comply with orders under a new state law to divest from companies deemed boycotting fossil fuels, including BlackRock.
Fund managers said divesting from BlackRock would breach their fiduciary duties.
In Indiana, lawmakers significantly weakened an anti-ESG bill after the state’s Public Retirement System said it would cost the pension an estimated $6.7 billion over the next 10 years.
The less aggressive bill, which reportedly drops the strict anti-ESG requirement and protects the state police pension fund, had a much smaller $5.5 million loss.
Kansas also watered down its anti-ESG legislation after the state pension for teachers and government workers said it would cost $3.6 billion over 10 years because they too would be unable to retain an investment manager without activity in ESG.
The bill, which was amended to allow pensions to keep their fund managers, passed last week and bars the pension, state and localities from engaging in ESG.
It’s unclear whether it will be vetoed by Democratic Gov. Laura Kelly.
In Texas, where anti-ESG bills have had success, two state pension funds recently lobbied lawmakers against approving a ban on state pensions and any companies they work with to engage in ESG.
Amy Bishop, executive director of the Texas County and District Retirement System, told lawmakers that they do not engage in ESG but if they were forced to adjust their asset allocation, it would cost upwards of $6 billion over the next 10 years because the legislation “would keep us from partnering with some of the best investment managers in the world.”
Texas Senate State Affairs Committee Chairman Bryan Hughes, a Republican, responded to Ms. Bishop that he was “thankful TCDRS does not do ESG” but added that if they do, “that will not be allowed.”
“Let’s be clear about that: if they’re hiring managers who have pledged to use oil assets to push political agendas, that will be affected by this bill,” Mr. Hughes said.
• Ramsey Touchberry can be reached at rtouchberry@washingtontimes.com.