Rows of solar modules generate electricity at UL-Lafayette’s Photovoltaic Applied Research and Testing (PART) Lab on Aug. 9, 2021. (Wes Muller/Louisiana Illuminator)
A panel led by two conservative Louisiana legislators is working to understand and eventually end the use of progressive corporate principles known as ESG that often support sustainable energy and socially responsible ways to do business.
The acronym — which stands for environmental, social and corporate governance — is used primarily in the investment and insurance sectors, and it has become the latest target of politicians who see it as a threat to the fossil fuels industry.
Rep. Valarie Hodges, R-Denham Springs, sponsored House Resolution 246 in this year’s legislative session. It formed the Environmental, Social, and Governance Criteria Study Group.
The study group held its first meeting last week, during which chairman Rep. Larry Frieman, R-Abita Springs, said its goals are to understand what ESG is and “hopefully eliminate its use in our state of Louisiana in all of our sectors and industries.”
On the insurance side, ESG is a set of metrics used to rate a company’s exposure to risk factors that fall under the categories of environmental, social and corporate governance risks.
One example, according to the CFA Institute’s Chris Fidler, is an insurance underwriter assessing the environmental risk of a company in a flood-prone area. The CFA institute is cited in Hodges’ resolution.
A social factor might include whether a company exploits cheap foreign labor, and a governance factor could include whether a company has conflicts of interest on its executive board. The “G” in ESG is the least controversial category of the three, Fidler said.
In the financial sector, some banks offer discounts to corporate borrowers who meet various ESG goals, according to The Washington Post.
In a similar way, investors can use ESG factors to decide which companies they want to invest in as a way to make a profit while influencing society at the same time. It’s called impact investing, Fidler said. Investors can use their own personal ESG criteria to rate and select companies or can invest in pre-packaged ESG funds offered by brokerage firms that have already assessed the companies.
There is no universally accepted set of standards that defines what can be included under ESG categories, Fidler said. For instance, some firms have “sustainable” ESG funds that include nuclear energy companies, while others exclude nuclear investment from their portfolios, he said.
ESG investing can span the political spectrum, though usually under a different name. Some brokerages use the concept of impact investing to create funds they can market to conservatives. For example, Point Bridge Capital sells a MAGA ETF that invests in 150 Republican-friendly companies.
“ESG investing includes a broad number of techniques and motivations,” Fidler said. “Investors can incorporate religious or moral values to avoid companies they don’t agree with.”
In a phone interview Monday, Hodges said she is concerned ESG is forcing progressive policies on everyday Americans and could harm Louisiana’s oil and gas industry.
“It’s a subjective political score, really, is what it is,” Hodges said. “We need to decide how far is it going to go.”
The primary goal of the ESG Study Group is to make the public aware of the issue and determine if legislation is needed to stop it, she said.
Hodges said she heard from a constituent business owner whose supplier has an ESG agenda and is essentially trying to strong-arm the owner into purchasing electric trucks that are nearly three times the price of internal combustion trucks.
A manufactured backlash
Many corporations have embraced some ESG principles, specifically those related to the energy transition, not because they’ve caved to pressure from banks with liberal agendas but because they see it as profitable.
Most of the world’s major auto manufacturers have already implemented plans to completely phase out fuel-burning vehicles in the years ahead. General Motors, for example, is transitioning its entire lineup to be electric by 2035.
“We feel this will be the successful business model of the future,” a GM executive told NBC News in January 2021.
Hersh Shefrin, an economist and finance professor at Santa Clara University, said auto manufacturers are transitioning to electric to make money. They realized the true size of the market for electric vehicles when Tesla grew from a small startup to the most valuable automaker in the world, he said.
Other companies may be seeking to capitalize on the ESG trend by implementing carbon-reduction technologies and reducing their exposure to other ESG risks such as conflicts of interest and poor labor relations.
Whether that proves to be profitable is a concern of both Republicans and Democrats as well as financial watchdogs such as the U.S. Securities and Exchange Commission (SEC).
However, while some in the Republican Party want to simply get rid of ESG, the SEC wants publicly traded companies to disclose more information about their exposure to ESG risks. In early 2021, the agency announced it was implementing ESG disclosures into its regulatory framework — a way of protecting investors from things like conflicts of interest, proxy voting and “greenwashing,” a marketing ploy that overhypes certain businesses and technologies to appear more sustainable or socially responsible than they are.
Conservative groups began organizing an ESG backlash that year.
It reached Louisiana in October when state Treasurer John Schroder pulled nearly $800 million in Louisiana’s investments from the asset management firm BlackRock, claiming its environmental focus conflicts with the state’s oil and gas interests. BlackRock CEO Larry Fink has urged companies and shareholders to confront the risks of climate change in their investment decisions.
According to a New York Times investigation, the idea that prompted Schroder to abandon BlackRock came from the fossil fuel industry. He, along with nearly two dozen Republican state treasurers from across the country, have been following the directives of the State Financial Officers Foundation, an obscure nonprofit group with deep ties to the oil industry, the report said.
The Times uncovered a trove of emails and internal documents that show a complex web of groups, with funding from oil billionaires Charles and David Koch, are pulling the strings of the treasurers who are on the frontlines of the ESG backlash.
The groups have pushed the treasurers to divest state money from BlackRock, CitiBank, Bank of America and J.P. Morgan. Emails show the groups provided the treasurers with talking points and strategies on how to respond to media questions. The Times report pointed out that one of the memos given to the treasurers misrepresented how banks were going to require businesses to switch to electric vehicles in order to get loans or make homeowners put solar panels on their roofs to get mortgages.
No banks have proposed such measures, but some Republican politicians think it’s possible if ESG isn’t stopped. Hodges said she worries Americans will be “heavily penalized” if they don’t get onboard with the ESG agenda and worries that a rapid rollout of the energy transition will harm the economy.
“They’re wanting to force this agenda so fast that it’s really not sustainable,” Hodges said. “I’m all for being conscientious of the climate, but these things need to be rolled out slowly.”
Conservatives aren’t the only source of the ESG backlash. Some liberals oppose ESG, criticizing the lack of defined criteria as an invitation for corporate greenwashing, Fidler said.
Can states ban liberal investing?
Hodges did not give specifics on what a law to ban ESG might look like.
When Schroder divested state treasury funds from BlackRock, he wrote in a press release that “ESG investing violates Louisiana law on the fiduciary duties which require a sole focus on financial returns for the beneficiaries of state funds.” However, he didn’t say whether any of the treasury’s money was actually in an ESG portfolio or if BlackRock was forcing the state into ESG investing.
ESG investing is a choice that the investor makes, and there are already antitrust laws that would prohibit fund managers from violating fiduciary duties, Fidler said, adding that it would be a legitimate concern if a state pension plan was being used for impact investing.
Shefrin, the economist, said there’s no evidence that ESG investing reduces returns in any meaningful way.
The prospect of further actions by Republican lawmakers and state treasurers have prompted concerns that partisan divisions could infect the financial sector, creating a world of “red banks” and “blue banks.”
“Can a state government make investors invest in tobacco companies if they don’t want to? Or induce them to invest less in stocks of companies that they deem to be improving social conditions, like Tesla?” Shefrin said.
Shefrin said opposing ESG or choosing non-ESG investments is philosophically just like ESG investing because they both choose investments that express the values of the investor.
It’s not likely banks will become partisan institutions any more than companies currently exercise political agendas, Fidler said. But it is theoretically possible depending on what the implications are for bank portfolios and profitability, according to Shefrin.
“Investors seek competitive returns, even when they express their values for ESG,” Shefrin said. “There’s a limit to the costs people are willing to pay for that expression.”
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