Background

The United States has been experiencing a rise in legislation that is aimed at thwarting the ability of individuals and companies to invest their money in line with the environmental, social, and governance (ESG) principles that have gained substantial traction amongst investors in recent years. This so-called “anti-ESG” legislation has come in the form of state- and federal-level bills that often seek to create penalties for considering ESG matters in making investment decisions.

By restricting the ability of investors to appropriately consider ESG as part of the decision-making process, the various passed and proposed regulations are attempting to police which financially material factors companies and individuals are allowed to consider when investing their money.

This drive to put in place anti-ESG legislation has had a broader impact than just on the jurisdictions in which the laws are effective, as the individuals and groups targeting ESG have also been attacking companies and investors that they see as outsized ESG offenders. The most notable target here has likely been BlackRock’s Larry Fink, who, perhaps as a result of this intense public pressure, dialed back substantially on the company’s historically vocal stance on addressing climate change and other ESG initiatives in his letter this year to CEOs and clients. However, while prominent investors may be notably less vocal about their interest in ESG lately in the face of the intense political stigma around the topic, ESG-related risks and opportunities remain an important component of the investment decision-making process, and investor interest in understanding all factors that impact their investments is not changing.

Federal Anti-ESG Bills

In late February 2023, House Republicans voted to overturn a Department of Labor (DOL) rule that would allow “decision makers to consider environmental, social, and corporate governance investment criteria as long as they are in the best financial interest of plan participants.” Effectively, overturning the rule would have prevented the department from enforcing its ESG retirement investing rule. The current DOL law overturns Trump administration laws which required investments to consider only financial factors. In late May, President Biden used his first veto to defend this rule and reject the Republican proposal to overturn it.

State Anti-ESG Bills

Meanwhile, Republicans at the state level have introduced a variety of bills aimed at matching the spirit of the federal bill at home. As of June 2023, at least 165 distinct anti-ESG bills have been introduced in 37 different states, with 19 laws and six resolutions passed this year alone. While anti-ESG bills can take many forms, two commonly used tactics are “boycott ESG” bills and “anti-ESG investment” bills. While boycott bills differ slightly from anti-ESG bills in their mechanics—the former generally prevent the state from doing business with companies that have integrated ESG factors into their business, whereas the latter generally prohibit the use of state funds for investments that consider ESG—they all seek to throttle the growing significance of ESG.

Texas

Texas’s boycott bill was passed in 2021 and prevents authorities from doing business with firms that have integrated ESG into their investment decisions. In August 2022, the state comptroller created a list of 10 financial firms and 348 investment funds the state must divest from (for allegedly boycotting fossil fuel-based energy companies critical to Texas’s economy). Lawmakers state that using ESG factors in the investment process will result in decreased financial returns. A study by researchers at the Federal Reserve Bank of Chicago and University of Pennsylvania’s Wharton School has estimated that the initial cost for Texas cities in the first eight months of the law’s implementation amount to between $303 million to $532 million in additional interest.

Florida

In April 2023, Florida’s governor Ron DeSantis signed an anti-ESG bill that prohibits state and local governments from using ESG factors in their investment decision-making processes. Florida has also pulled over $2 billion in assets from BlackRock over concerns that the investment manager uses ESG factors in its investment decisions. BlackRock pushed back on this decision while buckling down on the fact that they are acting as a fiduciary with the sole goal of driving returns. In a statement, the firm expressed their surprise at Florida’s decision and overall concern about anti-ESG legislation, announcing, “We are disturbed by the emerging trend of political initiatives like this that sacrifice access to high-quality investments and thereby jeopardize returns, which will ultimately hurt Florida’s citizens.”

Pushback Against Anti-ESG Sentiment

Despite the rise in anti-ESG bills, investors and other market movers have continued to pursue ESG initiatives, even if not quite as publicly as they had in the past. In 2022, State Street increased its federal lobbying amount from $1 million to nearly $2 million. Additionally, BlackRock increased its spending on federal lobbying by 63% to a total of over $2 million in 2022. Both BlackRock and Vanguard have also increased the number of registered lobbyists in Texas as the state has a large amount of passed and pending anti-ESG legislation

Further, there has been considerable pushback from certain U.S. states against the anti-ESG regulations. In 2020, Illinois passed the nation’s first pro-ESG law called the Sustainable Investing Act (ISIA) which requires every state agency to outline how they would consider ESG factors in their investment decisions. Minnesota signed a bill in January 2023 that requires utilities to supply customers with 100% carbon-free electricity by 2040. Most recently, Arizona Governor Katie Hobbs vetoed an anti-ESG bill passed by the state’s Republican-controlled legislature. Additionally, a number of states have introduced pro-ESG legislation running the gamut from promoting the consideration of ESG factors in state investing to prohibiting investments in industries such as fossil fuels and firearms to a proposed bill in Massachusetts structured specifically as anti-anti-ESG legislation.

At the federal level, Democratic lawmakers have introduced the Freedom to Invest in a Sustainable Future Act, a bill that would explicitly allow retirement plans to consider ESG factors. As of July 2023, the bill is still in Senate Committee and has not been sent to the House of Representatives.

Further, capital continues to flow into sustainable funds—in 2022, amid substantial outflows in the broader universe of U.S. funds, sustainable funds continued to see inflows, continuing a decade-long trend of growth. Companies, meanwhile, continue to incorporate ESG into their public disclosures, with more than 90% of S&P 500 companies now publishing an ESG report of some sort.

Our Take at HXE Partners

Ultimately, while anti-ESG sentiment has gained momentum in recent years and created uncertainty in a somewhat nascent space, individuals, investors, and companies have continued to advance ESG initiatives despite these headwinds, a show of the long-term staying power of the foundational concepts of ESG.

Environmental, social, and governance factors are necessarily a part of the broader set of considerations that companies must review when assessing the risks and opportunities associated with pursuing a given business strategy. Despite the current anti-ESG efforts, companies will nevertheless need to be prepared to respond to growing interest and pressure from stakeholders, including investors, clients, or regulators, on these key issues.