What will U.S. partisanship mean for ESG?

What will U.S. partisanship mean for ESG?

Disney and Florida Republicans have clashed over LGBT+ issues
Photo by Kitera Dent on Unsplash

 

Many investors are looking beyond financial performance to consider the environmental, social and governance (ESG) impact of their investments, and how they can effectively manage ESG risks to their investments. In most rich countries, ESG is a technical issue. Globally, political parties have embraced the concept because it promotes good corporate governance and social responsibility and aligns more finance to climate change solutions. However, in the United States, Democrats and Republicans are increasingly divided on the merits of ESG, reflecting the depth of division in the country. Some notable political fights have broken out, perhaps most infamously the fight between Disney and Florida’s Governor Ron DeSantis over Republicans’ perception that corporations are aligning with left-wing ideologies.

 

What is the partisan division over ESG?
What will U.S. partisanship mean for ESG?
Photo by Gagan Kaur on Pexels

Democrats tend to view ESG as a tool for addressing important issues, such as climate change, income inequality, diversity and gender equality. They believe that companies have a corporate responsibility to grow sustainably and to incorporate the well-being of their stakeholders in their business models. Democrats also tend to argue that ESG investing can help drive positive change because investors large and small are free to channel their dollars toward companies with strong ESG track records.

 

These political messages appeal to younger Americans, who are increasingly seeking out investments that align with their liberal values and concerns about climate change.

 

On the other hand, Republicans have been more skeptical of ESG, viewing it as a form of “woke” ideology that prioritizes social and environmental policy issues over financial performance. They argue that ESG metrics are subjective and politically biased, and that companies should focus on maximizing shareholder value only through financial criteria. Some Republicans also worry that ESG investing could be used as a tool for political advocacy against them, or could penalize important American industries, especially oil and gas.

 

The topic has already entered the contest for President in 2024. Presidential hopefuls, such as Florida Governor Ron DeSantis, and former Vice President Mike Pence, have highlighted their political opposition to ESG, arguing that ESG is a Leftist tool to impose “woke” ideology on America.

 

These political messages appeal to Social Conservatives who feel that corporations are no longer in step with their values. The clash between Disney and Florida Republicans over LGBT+ issues being a case in point.

 

Some of these messages definitely appeal to growing anti-corporate sentiment. According to the Pew Research Center, anti-corporate sentiment has risen very quickly among Republicans, who are much more likely to express negative sentiment about banks and tech companies than a few years ago. According to Pew, comparable majorities of Liberal Democrats and Conservative Republicans now think large banks and corporations have a negative impact on society.

 

 

So, what will U.S. partisanship mean for ESG?

 

The partisan debate has already played out in a variety of ways, including in the regulatory and legal arenas. For example, in 2020, the U.S. Department of Labor (DOL) proposed a rule that would have restricted retirement plan fiduciaries from considering non-financial factors, such as ESG, when making investment decisions. The proposal was revised by the incoming Democrat administration, to allow asset managers to use ESG to mitigate risks and align their investments with investors’ goals. When the Republican-led House of Representatives passed legislation limiting ESG investing in 2023, President Joe Biden used his first veto to overrule them.

 

Similarly, in some States, Republican lawmakers have proposed or passed laws that remove public investments from asset managers who use ESG investing techniques. For example, in Texas, the Teacher Retirement System was prohibited from investing with 10 financial firms blacklisted by the State for promising to transition away from investing in fossil fuels. Florida, Indiana and Kansas have imposed similar ESG prohibitions on State funds.

 

Separately, 2022 was also a bad financial year for ESG, with most ESG funds underperforming regular funds because of the spike in energy prices after the invasion of Ukraine.

 

Despite the set backs to ESG, anti-ESG Republicans appear to be swimming against the tide. While there are certainly challenges surrounding ESG, growing popularity and interest around sustainability in particular suggests that many investors believe it can be a powerful tool for driving positive change and for mitigating major risks to financial markets. Above all, insurance companies and private pension funds have driven the demand for ESG investing because their experts consider climate change to pose a major threat to their profits (insurance companies) and to long-term returns for their beneficiaries (pensions.)

 

What is more, forthcoming European Union regulations will require U.S.. based companies doing business in Europe to make sustainability disclosures. “The train has left the station.”

 

Some of the financial firms that have been in the line of fire also appear to be unmoved. While Blackrock has shied away from using the term ESG, they also committed to pursuing the underlying principles.  Bank of America underlined that it would not change course on ESG in response to Republican threats, “… because our company has been around for almost 240 years.”

 

Rather, the priority of many major corporations is to promote uniform global  standards and regulations through a new multinational International Sustainability Standards Board. Because ESG definitions and disclosures have been inconsistent, there has been public confusion about ESG and the private sector has been overburdened with reporting requests from activists. The lack of standard rules and expectations has also left corporations vulnerable to a no-win politics context where extremist partisans can project whatever grievance they want onto the term “ESG.” On the one hand, anti-corporate Liberal Democrats accuse corporations of not doing enough on climate change, and demand immediate divesting from fossil fuels. On the other hand, anti-corporate Conservative Republicans accuse corporations of politically-motivated “woke-ism.”

 

“So what” for you?

 

Despite the global efforts to converge on climate and sustainability standards, the partisan divide over ESG is likely to continue in the United States, with Democrats and Republicans differing on the merits of ESG investing. Democrats will tend to support the issues highlighted by ESG. Republicans will tend to view ESG as antithetical to their interests and values. Unfortunately, there may be less predictability to ESG regulations in the U.S. than in other countries, with a “Red State” and “Blue State” maze of competing regulations for corporations to navigate.

 

As the debate about ESG continues, it will be important for all investors to carefully consider whether and how ESG metrics are important to them, and to stay informed about U.S. and international regulatory and legal developments that could impact ESG investing in the future.

 

If you are an individual U.S-based investor interested in ESG issues, FINRA offers some tips on ESG here.

 

We never offer investment advice. ESG Hive is an educational community. If you would like to learn more about ESG, you can also check out our articles on “greenwashing” and “Are ESG ratings a scam?” as we look at some of the other controversies surrounding ESG. Our article on ESG for Beginners walks you though the basics of ESG. You can also learn more about the faith-based origins of ESG here. You can also take our popular ESG Quiz to help you think about your own ESG philosophy.

 

Tags :
ESG and Sustainability Standards,ESG Basics,ESG Investing,Governance,Shareholder activism,Social
Share This :

Leave a Reply

Your email address will not be published. Required fields are marked *