Political spat over climate risks in investments gets hotter

ST. Paul, Minn. — The political battle is intensifying over whether it’s financially prudent or “woke” folly for a company to consider its impact on climate change, workers rights, and other issues when making investments.

Republicans from North Dakota to Texas are ramping up their criticism of “ESG investing,” a fast-growing movement that says it can pay dividends to consider environmental, social and corporate-governance issues when deciding where to invest pension and other public funds. Democrat in traditionally blue states such as Minnesota are also considering whether ESG principles should be a bigger part of their investment strategies.

The “E” in ESG for environment often draws the most attention due to the debate about whether or not to invest in fossil fuel companies. Investors look at how companies treat their employees in the broad social bucket. They believe that a happier workforce can lead to greater productivity. Investors pay attention to the governance aspect. They make sure boards hold CEOs accountable and reward them for their best performance.

The ESG industry uses scorekeepers to give companies ratings on environmental, social, and governance performance. Investors may be hesitant to invest in companies or governments that are seen as more risky. This can lead to higher borrowing costs and financial problems.

Florida is one of the most popular battlegrounds for ESG. Gov. Governor Ron DeSantis banned state fund managers from using ESG considerations when deciding how to invest state pension funds. And even as his state cleans up from the environmental destruction caused by Hurricane Ian, DeSantis plans to ask the Florida Legislature in 2023 to go even further by prohibiting “discriminatory practices by large financial institutions based on ESG social credit score metrics.”

Pension funds are often caught in the middle of the battles. Teachers are asking the Florida Education Association questions about DeSantis’ plans for their retirements.

“I usually tell them it’s still unclear what this exactly means,” said Andrew Spar, president of the union, which represents 150,000 teachers and educators across the state. There is much to be determined, including which funds the pension investments will be directed towards.

In contrast, the Minnesota State Board of Investment is considering a proposal to adopt a goal of making its $130 billion in pension and other funds carbon-neutral. Already, the board uses shareholder votes to promote climate issues. It is open to climate-friendly investments and avoids thermal coal investments. The new proposal goes further, but it doesn’t call for total divestment of fossil fuel companies as many climate activists advocate.

The ESG debate has spilled over into the race to Minnesota’s state auditor. Democratic incumbent Julie Blaha, who has named DeSantis among the leaders she believes are politicizing ESG discussion, has cited recent high returns of the investment board as proof that the approach works.

“To act as a good fiduciary you must consider all risks. The evidence is clear that climate risk is an investment risk.” Blaha stated.

But Ryan Wilson, Blaha’s Republican challenger says that investment returns must be first and that all risks must also be considered. He believes that the board shouldn’t “disproportionately dictate” that climate risk should be more important than other risks.

Proponents say considering a company’s performance on ESG issues can boost returns and limit losses over the long term while being socially responsible at the same time. Investors can avoid companies that appear more risky than they are, such as stocks that are too expensive, by using this lens. The ESG approach could also uncover opportunities that Wall Street may not be aware of, it is believed.

There is no consensus as to whether an ESG approach will result in lower or higher returns.

Morningstar, a company that tracks mutual funds and ETFs, says slightly more than half of all sustainable funds ranked in the top half of their category for returns last year. The performance has improved over the past five years with almost three-quarters of the funds ranking in the top 50 percent of performers in the category.

Rejecting ESG may have a negative impact on investment performance and other factors.

A Texas law which took effect in September 2021 prohibited municipalities from doing business in financial institutions that have ESG policies that prohibit investments in fossil fuels and firearms companies, or industries that are vital to the Texas economy. It was a costly decision.

After being barred from underwriting municipal bonds in local jurisdictions, five major underwriters — JPMorgan Chase and Goldman Sachs as well as Citigroup, Citigroup, Bank of America, Bank of America, and Fidelity — left those markets. According to a Wharton School study, the loss of these big players would result in Texas communities paying higher interest on their bonds. Fidelity claims it has since restored good standing with Texas, certifying that it does no boycott energy companies and does not discriminate against the firearms business.

Many Wall Street banks and investment management firms have been vocal in their support of ESG, making them a favorite target of anti-ESG politicians. Republican state treasurers have pulled out or plan to pull out over $1.5 billion from BlackRock, the largest investment company in the world, and are working towards zero greenhouse gas emissions by 2050. The latest victim was Missouri, which was last month. Treasurer Scott Fitzpatrick accused BlackRock of putting the advancement of “a woke political agenda above the financial interests of their customers.”

Coal-producing West Virginia passed a law in June that allows for the disqualification of banks and other financial institutions from doing business with the state if they “boycott” energy companies. Treasurer Riley Moore quickly banned BlackRock and Morgan Stanley, JPMorgan Chase Morgan Stanley, Morgan Stanley, and Wells Fargo. He blamed them for driving capital out of the industry, which in turn led to high energy prices.

” We are not going to cause our own destruction,” Moore stated.

State officials have also been critical about ESG scores from rating agencies and other outfits. S&P Global, for example, rated North Dakota State Treasurer Thomas Beadle “neutral” in terms of social and governance metrics and “moderately negatively” for environmental factors. This is because the state’s economy and budget heavily depend on the energy sector.

Lawmakers in North Dakota prohibited their investment board last year from considering any criteria that would not maximize returns. Senators considering next steps were informed by Beadle that ESG has created “significant headwinds for energy companies raising capital” and could impact his state’s tax revenues.

Federal agencies are another major battleground. The State Financial Officers Foundation is a group consisting of auditors, treasurers, and other officials from Republican states. They are trying to stop rules being drafted by the Securities and Exchange Commission and Department of Labor that require standard climate disclosures from companies and make it easier to allow pension plan fiduciaries and others to consider climate change and other ESG elements.

The industry has listened to the criticism and was even surprised at how fast it has accelerated. It is vowing to continue.

US SIF, an industry group that advocates sustainable investing, has $5 trillion in assets under advisement or management. Lisa Woll, its CEO, believes that most politicians opposing ESG investing, both at the national and state levels, don’t know what it is.

” If they did, it would be very difficult to make such allegations,” Woll stated. “It feels more like a talking point than an informed critique.”

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Choe reported from New York.