(NEW YORK) — The culture wars, fought nationwide in school board meetings and college classrooms, have entered a new arena: Wall Street.
A sharp political divide has emerged over environmental, social and governance investing, or ESG, a type of investing that takes into account non-financial information about a company, such as its climate impact and staff diversity.
Prominent Republican politicians, such as Florida Gov. Ron DeSantis, have assailed ESG as “woke” capitalism that prioritizes liberal goals over investor returns, harming U.S. companies deemed insufficiently progressive and, in turn, hindering the wider economy.
Supporters of ESG, including financial firms that manage trillions in assets, have said considerations beyond the bottom line deliver the best financial gains. In weighing the economic threat posed by climate change, for instance, investors ensure the long-term health of their portfolio.
“There’s some risk that we could have red and blue banks, red and blue supermarkets,” Witold Henisz, faculty director of the ESG Initiative at The Wharton School of Business at the University of Pennsylvania, told ABC News. “America is more and more polarized.”
Here’s what to know about ESG and the political backlash against it:
What is ESG investing?
For decades, prevailing corporate wisdom held that companies face a choice between actions that are socially beneficial and ones that maximize shareholder value, said Alison Taylor, a professor of business at New York University who focuses on corporate responsibility and ethics.
ESG, by contrast, is an approach to investing that examines a company’s social or environmental impact precisely because it considers non-financial information useful for determining whether the company would deliver strong investor returns.
“The business would do good for the world and make more money,” Taylor told ABC News.
Depending on a given investor or policy, ESG takes into account a range of business practices, such as the release of carbon emissions or pollution, the treatment of employees and the presence of minorities within a company’s leadership.
Sustainable investment based on ESG criteria has grown to a $35.5 trillion industry, according to a study from the Global Sustainable Investment Alliance in 2020.
How has ESG risen to prominence on Wall Street?
Over roughly the past 15 years, ESG has shifted from an upstart financial trend to a mainstream strategy touted by industry titans, experts said.
The rise of ESG has been propelled by growing awareness about the negative effects of some corporate practices, in part due to the rise of social media, said Taylor of New York University. She also credited a young generation of investors, which has brought a focus especially on the role that companies play in exacerbating climate change.
Financial leaders have also taken up the cause. One major promoter of ESG, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, has highlighted for years the importance of non-financial information in assessing investment opportunities.
“Stakeholder capitalism is not about politics,” Fink said last year in a letter to CEOs. “It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”
The surge of ESG adoption has also coincided with a slew of studies that demonstrate its effectiveness in yielding stronger returns than traditional investing, as well as a host of findings that question its comparative benefit, Taylor said.
“There have been thousands of studies,” she said. “The jury is out on whether ESG delivers higher returns.”
Why have some Republican officials criticized ESG investing?
Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.
In some cases, Republicans have condemned the investing approach as a departure from free market capitalism, since it takes into account non-financial factors.
In a Wall Street Journal op-ed last year, former Vice President Mike Pence said, “The woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda on publicly traded corporations.”
“For the free market to thrive, it must be truly free,” he added.
In response to such attacks, proponents of ESG reject the notion that they’re deviating from investment fundamentals, since looming threats like climate change will have a profound impact on how the economy operates, Taylor said.
“Whether you’re on the left or right, you’re currently making the argument that you’re the rational capitalist and your opponent is the partisan hack,” she said.
Criticism leveled at ESG has not only come from the right, however. Progressives have criticized the practice for imposing vague or weak standards on companies, offering the imprimatur of virtue without the requirement of substantive action.
“Everybody hates ESG,” Taylor said. “The left hates ESG because they say we should not just think about issues when they have an impact on a company’s bottom line. There’s an imperative to address racism and climate change.
In response to criticism of ESG, BlackRock told ABC News in a statement: “Over the past year, BlackRock has been subject to campaigns suggesting we are either ‘too progressive’ or ‘too conservative’ in how we manage our clients’ money. We are neither. We are a fiduciary.”
“We put our clients’ interests first and deliver the investment choices and performance they need. We will not let these campaigns sway us from delivering for our clients,” the statement added.
What have Republican officials done to oppose ESG?
So far, attacks on ESG have primarily arisen at the state level, where some Republican-led states have divested their pension funds from firms that engage in ESG investing, while others have put forward legislation that would ban any public entity from carrying out financial business with such firms, including routine local policy decisions like raising money through selling bonds.
In August, 19 state attorneys general sent a letter to Fink criticizing the firm’s use of ESG criteria in overseeing state pension funds. That month, DeSantis approved a resolution that eliminates the consideration of ESG from decisions used in managing Florida’s pension investments.
On Monday, DeSantis took the effort further, proposing a set of measures that prohibit the consideration of ESG criteria by financial institutions in Florida, as well as banning the use of such criteria in all investments made at the state and local level, among other provisions.
“By applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda,” DeSantis said in a statement on Monday.
Republican states face financial consequences for such measures, Henisz said, noting the higher fees charged by smaller financial institutions that forego ESG investing. Texas cities will pay between $303 million and $532 million in additional interest on $32 billion in bonds due to the state’s ESG ban, a Wharton School of Business study found in July.
“The cost to the taxpayers in these states will limit how far they go,” Henisz said. “It’s more rhetoric than reality in terms of how divided the financial services sector gets.”
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