The New Front of the Culture Wars for GOP Governors: ESG Investing

Florida’s Ron DeSantis is the latest GOP governor to take on ‘woke’ Wall Street.

ESG Investing: the New Front of the Culture Wars

Florida Gov. Ron DeSantis speaks to supporters at a campaign stop in Geneva, Florida, on Aug. 24.(Paul Hennessy/SOPA Images/LightRocket via Getty Images)

Prominent GOP governors who many suspect have their eyes on higher office have found a new villain to target for their anti-“woke” campaigns: Wall Street.

In recent weeks, both Florida Gov. Ron DeSantis and Texas Gov. Greg Abbott have moved to ban, or restrict, companies that invest in funds and companies that favor environmental, social or good government causes such as green energy, worker rights and social justice.

Last month, Texas published a list of investment firms that it says may be in violation of a 2021 law that bans state retirement and school funds from being invested in firms that have policies restricting investments in oil and gas and firearms companies.

DeSantis, meanwhile, and his colleagues on the State Board of Administration in late August adopted a resolution directing the state’s fund managers to invest Florida taxpayer and retiree funds “without considering the ideological agenda of the environmental, social, and corporate governance (ESG) movement.”

“Corporate power has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity,” DeSantis said after the board’s vote.
“This guidance will ensure that the decisions made by these civil servants on behalf of the people of Florida are in accordance with the voters’ values as expressed through the democratic process rather than blindly in lockstep with the ESG mania taking hold of Wall Street and Washington,” added DeSantis, whose margin of victory in his 2018 election was less than one half of one percent.

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Texas recently finalized a list of 10 financial institutions and a list of nearly 350 companies that are subject to the new law. At the top of the list is BlackRock, a U.S. firm that is the world’s largest money manager and a proponent of ESG investing.

But that has not stopped other states from following the lead of Texas and Florida. And the move against investment firms is part of a wider attack on corporate America, including the battle DeSantis is fighting with Disney after the company criticized the state’s “Don’t Say Gay” bill and states that have castigated companies for offering to pay employees to travel out of states that prohibit abortion to those who allow it.

BlackRock recently responded to a letter it received from 19 Republican state attorneys general who accused the giant investment company of putting a “climate agenda” ahead of its clients, according to The New York Times.

BlackRock challenged the letter and said it contained numerous inaccuracies. BlackRock did not respond to a request for comment, but in an interview with the Financial Times in August a firm executive branded the law “anti-competitive.”

“We have never turned our back on Texas oil and gas companies,” said Mark McCombe, who heads BlackRock's U.S. operations.

He pointed out that BlackRock is the largest investor in the state’s oil and gas industry with $290 billion in holdings in the state. Indeed, BlackRock is among the top three largest shareholders in Exxon Mobil and ConocoPhillips, both of which count the Lone Star state as their global headquarters.

The moves have brought a backlash from the investment community, which points out that part of the fiduciary duty of state fund managers is to consider a wide range of investments that diversify their risk and increase their returns.

“We urge Texas policymakers to prioritize Texas families over partisanship,” the Investment Company Institute said in a statement in late August. “State pension fund managers must be able to consider a broad range of investments that most appropriately support the needs of these Texas savers, free from politics.”

It’s not clear whether the politicians in red states actually know what their fund managers are doing. A study by Morningstar found that state fund managers overwhelmingly support ESG initiatives when asked to vote as shareholders on resolutions that are brought before companies and investment funds.

The study found that support overall among state pension and retirement funds was 80% in favor of ESG proposals in 2021. Florida and Texas were significantly more pro-ESG, voting 99% and 87% in favor.

“Support crossed party lines, though public pensions based in Democratic-leaning states tended to vote in favor of ESG resolutions more often than those based in Republican-leaning ones,” the report found.

“They’re actually voting for these provisions and doing their fiduciary duty,” says Janet Yang Rohr, director for multi-asset and alternatives research at Morningstar and lead author of the report. As for ESG funds, she adds, “In some cases, it’s just good investing.”

Rohr did find two notable exceptions to the trend – Ohio and Georgia – where there were overwhelming votes against ESG proposals. In Georgia, the state Teachers Retirement System voted against all but one of the proposals covering 67 companies where it had a stake. In Ohio, the pension fund (the specific one was not identified) voted no in 44 out of 66 occasions where it held positions.

Although DeSantis and others stress the need for pension fund managers to adhere to their fiduciary or pecuniary duties, a study done by Wharton School finance professor Daniel Garrett and Federal Reserve economist Ivan Ivanov found there is a cost to limiting the investment universe.

The pair found that since the Texas law passed in 2021, cities in the state will pay an estimated additional $303 million to $532 million in interest on their bonds due to the lack of competition after five major underwriters pulled out of the market; one has since reentered.

“Among remaining competitive sales, we do see less competitive action,” Garrett says.

“While we can't directly measure the competitive impact with the available data, our analysis indicates competition is the most important factor for the higher borrowing costs,” he adds.

Eschewing companies that support ESG initiatives could well be costly in fiduciary terms alone. Take Apple, a company that often is among the top-listed firms for sustainability and other ESG measures. Its 10-year stock return is 641%, compared to 181% for the broader market as measured by the S&P 500, which includes Apple.

In some cases, the GOP push against corporate America is analogous to efforts dating back to the 1960s, when liberals and Democrats railed against companies who provided material and support to the U.S. war in Vietnam. In one famous instance, demonstrators blocked Dow Chemical, a maker of napalm used to defoliate the jungles in the country, from having its recruiters appear on campus.

A decade later, a GM board member outlined the Sullivan Principles which U.S. companies were encouraged to follow in treating their workers in South Africa, during the period known as apartheid. Other more recent initiatives from the left end of the political spectrum have included the 2017 boycott of the NCAA’s Final Four basketball tournament after North Carolina passed its so-called “bathroom bill” which was seen as discriminatory toward transgender people.

And just as recently as this July, the American Federation of Teachers passed a resolution calling for divestment of money invested in public and private pension plans from fossil fuel companies and reinvestment into “projects that benefit displaced workers and front-line communities.

It’s likely these latest moves to politicize pension fund investing will continue amid a polarized nation that sees culture wars as an effective tool to galvanize voters.

“It’s an emergent thing, it’s a fast-moving issue,” says Len Gilroy, vice president of government reform at the Reason Foundation and senior managing director of its pension integrity project.

Gilroy says Texas and Florida are taking different approaches, with the former seeking more to protect a powerful industry and Florida making more of a political statement.

“If you look at Florida and Arizona, it looks like the political rhetoric around those policies is pretty aggressive,” he says.

A bigger issue for the funds, he warns, is that collectively state and local pension funds face more than $1 trillion in unfunded liabilities – the difference between what they owe their members and what they currently have set aside to pay out to future retirees.

Anything that ties the hand of the fund managers, he says, may well make it more difficult to meet their investing goals, especially during a time when markets have been posting negative returns.

Still, he concedes, “ESG is just the latest fad” of the political culture wars and is not likely to end anytime soon.

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