ESG under fire in US state capitols

This past weekend we read with interest The Economist’s deep dive into environmental, social and governance (ESG) investing. The central argument is that ESG “is deeply flawed”; that it is riddled with greenwashing and has become “an unholy mess that needs to be ruthlessly streamlined”.

Those who have been around this space for a while know there is a good bit of it that is indeed in need of a good pruning. But one of the central issues with ESG is that it means different things to different people. Some consider it to be the work of the nuns and other activists who file shareholder proposals to agitate for corporate change. Others see ESG as a “big data” project for investors desperately seeking more information about their holdings — a trend that is here to stay, whatever happens to this acronym.

And while global warming is the clear and present danger, it would be short-sighted to ignore ESG’s influence in wringing diversity disclosures and driving pressure for workplace rights — crucial social concerns that have progressed rapidly in the past 18 months.

As The Economist and others have pointed out, government action is vital to tackle problems like global warming. But in the absence of comprehensive reforms, ESG is clearly having some impact. For evidence, please see our first item today on the ESG backlash from the oil and gas industry’s political allies in some conservative US states. And read on for Simon’s report from last week’s sustainable finance conference in Oxford, which was abuzz with talk of climate lawsuits. (Patrick Temple-West)

ESG’s global rise collides with anti-‘woke’ politics in US capitols

From Tucker Carlson to Mike Pence, bashing ESG investing has become popular sport among US conservatives. As worries about “woke-ism” proliferate, asset managers offering ESG products have found themselves at the centre of unwanted attention.

The criticism can be shrugged off as political posturing, but the anti-ESG laws being enacted in conservative states are adding significant risks for asset managers worldwide.

In Idaho, for example, legislation went into effect this month that prohibits the state’s investment funds from considering ESG characteristics “in a manner that could override the prudent investor rule”.

Last month, West Virginia required the state’s treasurer to publish a list of financial companies “engaged in boycotts of energy companies”. The treasurer can then exclude these companies from banking contracts.

Both bills follow similar legislation passed in Texas and Oklahoma last year.

But this year’s anti-ESG crusading has hit resistance elsewhere. In Arizona, a bill that would have made it illegal for financial institutions to turn down business based on a group’s ESG score deadlocked in the state house and failed to advance. Two Republican lawmakers voted with Democrats to stop the bill.

The Arizona case illustrates the belief among some Republicans that boycotting financial companies over ESG could backfire.

The West Virginia legislation drew opposition from Republican state senator Eric Nelson. In an interview with Moral Money, Nelson warned of the legislation’s “unintended consequences”. Excluding certain financial firms could drive up West Virginia’s borrowing costs, he said.

“It is much sexier to say that this is an anti-energy bill than it is an anti-financial risk bill,” he said.

And there is academic evidence to support his statement. Professors at the University of Pennsylvania this month published research about Texas’s anti-ESG bill, which prohibits municipalities from working with banks that have policies against guns and fossil fuels. They estimated that for the first eight months of the law’s existence, Texas cities will pay an additional $303mn to $532mn in interest on debt. By shrinking the pool of banks available to underwrite municipal debt, the rule is pushing up borrowing costs, the research found.

Still, laws attacking ESG aren’t going away anytime soon. Republicans have already made clear their intention to make ESG a target in the November midterm elections, in which Democrats are expected to lose control of Congress. The GOP is likely to be further animated now that the Securities and Exchange Commission has prioritised mandatory climate disclosures for companies.

The anti-ESG legislation adopted in a handful of conservative states could snowball further, drawing ESG into culture wars. Asset managers worldwide with products sold in the US will need to pay attention to the rising political risk in this space. (Hannah Wendland)

The climate litigation risks you need to watch

I’ve learned the hard way to choose carefully which conferences I attend. But I decided it was worth the train ride from London to attend last week’s maiden Oxford Sustainable Finance Summit. With a line-up featuring some top international figures in the space, it was a chance to put a finger on the pulse of the sustainable finance community. And the subject of most intense discussion, within the University of Oxford’s ancient walls, was litigation.

Since the Paris agreement of 2015, a gathering stream of climate lawsuits has hit companies and governments. The summit’s attendees seemed convinced — some with excitement, others with open concern — that this is just the start.

A landmark ruling came last year from Germany’s constitutional court in a case brought by young activists from Fridays for Future, the movement founded by Greta Thunberg. The court ordered the German government to improve its climate action plan, which it said was insufficient to protect future generations.

Linus Steinmetz, part of the group that brought the German suit, said the youth climate movement sees litigation as a core part of its toolkit. “In democratic societies, suing corporations as well as suing the government is a basic tool of civil discourse,” the 18-year-old said.

That’s bringing new risks for organisations and also individuals. John Firth, of insurance company Willis Towers Watson, pointed out that “duty of care” requirements mean a risk of lawsuits over professional advice that fails to take climate-related threats into account. “Everybody who acts as a professional adviser is at risk,” he warned.

Firth also flagged the prospect of international lawsuits by developing countries, which he said are “losing patience” with inadequate financial support from rich nations that bear the most responsibility for climate change.

Some participants voiced concern about the risk of litigation hindering climate action. Sandra Boss, stewardship head at asset management company BlackRock, discussed the company’s position on proposed emissions disclosure rules from the US Securities and Exchange Commission.

BlackRock has been criticised for urging the SEC to make the rules less far-reaching. Boss said its position was driven partly by worries that overly ambitious regulation could be overturned in court, dealing a major setback to the push for more climate-related disclosure.

Other attendees, both publicly and privately, expressed concern about the fairness of litigation targeting businesses over voluntary climate-related reporting, at a time when many companies still aren’t bothering to make any disclosures. This could have a “chilling effect”, some warned, with companies keeping disclosure to a minimum in order to avoid becoming a target.

Yet Sarah Barker of Australian law firm MinterEllison pushed back against this logic. “You need to call bullshit on the chilling effect,” she said. “That is a complete misunderstanding of the law as it operates.”

Companies that avoid mentioning material climate-related risks in their public statements will face much more serious legal dangers, in the long term, than those that strive to share important information, Barker said. “It is a far higher risk to say little or to say nothing.” (Simon Mundy)

Smart reads

Today we want to highlight a couple of interesting analytical reports that have come across our desk in the past few days:

1. Amid heatwaves blazing across the northern hemisphere, Verisk Maplecroft’s analysis looks at the “cascading” risks of climate change. The report points to a wider ecosystem of sequential dangers, ranging from civil unrest to mass migration.

2. We were also interested to read this new study on corporate pay, from Ossiam and Proxinvest. It found that the more executives and directors are paid, the worse a company’s share price performs.