A backlash against companies investing in environmental, social & governance (ESG) initiatives has swept through U.S. state legislatures in the past three years. 23 states have adopted anti-ESG-related laws. This backlash has influenced how the general public perceives ESG investing. According to the investment research and rating agency Morningstar, anti-ESG sentiment has already resulted in a pullback of $5.2BN from sustainable funds in the first quarter of 2023.
The anti-ESG movement started when Republican lawmakers accused fund management giants like BlackRock and State Street of pursuing a ‘woke’ investing agenda last year. This ‘woke’ investing agenda focuses on the push for liberal values, considering and evaluating companies based on their policies around ESG metrics, when making investment decisions. The backlash got so bad that BlackRock’s CEO Larry Fink stopped using the term “ESG” altogether.
A research project on the language around ESG reporting by the MIT Climate & Sustainability Consortium that I worked on this semester found similar trends. Although the project is still in progress, our findings indicate many companies have either eliminated the use of “ESG” or significantly reduced or replaced the use of “ESG” in their sustainability-related reports.
However, is this backlash against ESG justified? What is anti-ESG really calling for?
ESG initiatives take into account non-directly-financial information about a company, such as its climate impact and staff diversity. For this reason, it is criticized by some Republicans, such as Florida Governor Ron DeSantis, as prioritizing liberal goals over investor returns. He argues that this approach would harm U.S. companies deemed insufficiently progressive and in turn hinder the wider economy. An anti-ESG sentiment would thus put financial returns first as it rejects measurements from ESG perspectives.
The label “anti-ESG” may appear to sound like going after financial returns is the end goal, but it’s just part of a larger “anti-woke” and “anti-sustainability” effort, which was summed up by an executive at Morningstar: “Anti-ESG is a proxy for opposition to the spread of ‘liberal values’ in civil society.” Although anti-ESG advocates are arguing for prioritizing financial returns, their actions will slow progress toward a more sustainable future.
In July 2022, West Virginia’s treasurer, Riley Moore, announced that it would no longer do state business with banks such as Goldman Sachs and JP Morgan Chase, both of which stopped financing coal companies. And In January 2023, Kentucky Treasurer Allison Ball placed Blackrock, JPMorgan, and Citigroup on a divestment list compiled in accordance with state law due to their fossil fuel boycott. Ironically, Citigroup is included because of its commitment to expanding ESG investments, yet it is still amongst the largest lenders for the fossil fuel industry.
It makes no sense to include Citigroup on such a list since it is heavily invested in the fossil fuel industry. Citigroup’s heavy investment in the fossil fuel industry would theoretically make great financial returns, which the anti-ESG advocates state is the most important. However, the fact that it is nonetheless on the list confirms that what the anti-ESG advocates really care about is companies’ claimed commitment to the liberal and sustainable goals that ESG embraces, not their financial performance.
The anti-ESG campaign is not coming from within the investment industry. It’s coming from conservative activists who oppose things like climate action, diversity, equity, and inclusion policies, better worker pay and benefits, and corporate CEOs speaking out on issues like abortion, voting rights, and gun violence. For instance, a leading effort in the anti-ESG movement, Dan Crenshaw the Texas Representative in Congress, made comments like “regulating climate change is not a government responsibility”. It is evident from the anti-ESG advocates’ actions that high financial returns aren’t the goal, but stopping efforts toward a more sustainable society is.