Will the anti-ESG movement hurt efforts to implement climate disclosures?

As the anti-ESG push in the US continues to become a polarising political issue, there are concerns it could influence regulators to become more cautious in their approach to implementing climate change disclosure measures.

The move against ESG has become a largely Republican issue, who say pension funds and other investment vehicles are imposing “woke” investments on unsuspecting Americans, such as renewable energy or avoiding oil companys. Those in support of ESG say it is a necessary criterion to highlight potential climate and social risks not just to the environment and society, but to companies’ bottom lines.

As the world approaches many climate change tipping points and extreme weather events become more common, some activists find the GOP’s stance on ESG investing and climate-related disclosures alarming.

Origins of the anti-ESG movement

The anti-ESG movement can be traced back to the mid-2000s when various rightwing thinktanks tried to undermine impact investing measures, said climate financial policy consultant Jordan Haedtler.

“They never really succeeded in putting it on the map, or getting some of these powerful rightwing organizations to embrace the messages that they were pitching until some of those previously fringe organisations became more influential during the Trump administration,” he said.

Still, the political push against sustainable investing didn’t really build momentum until earlier this year when there was a large uptick in state legislation against ESG-focused funds.

Between January and June 2023, there were at least 165 bills against ESG investment criteria introduced in 37 states, according to a report from climate risk consulting firm Pleiades Strategy, although 83 of those bills failed.

It’s not just states going after ESG principles. In July, a GOP-led congressional committee held several hearings during what it termed “ESG month,” and sent several bills to the House targeted at progressive causes like climate change.

The hearings covered a number of topics related to ESG investment and regulatory policies, including the influence of proxy advisory firms, whether ESG investment criteria has driven up housing and insurance costs, and the upcoming ESG disclosure requirements from the Securities and Exchange Commission (SEC).

One confusion in the debate is that there are two types of ESG investing, said Bethany Davis Noll, executive director at the State Energy and Environmental Impact Center at NYU School of Law. There are people who want to make a difference by investing or not investing in certain industries, known as impact investing. Then there are asset managers and other investors who are thinking about short and long-term risks and using ESG investments to protect their financial bottom line.

“I think it’s driving this whole thing and it’s part of the confusion, part of the reason why the polarisation is happening,” she said.

Where do regulators stand?

Republicans aren’t just trying to put pressure on investment funds, but regulators as well.

Last year, US president Joe Biden issued his first veto to overturn a GOP proposal, which had passed Congress and would have overturned an earlier Department of Labor ruling. This allows fiduciaries to take climate change and other ESG factors into account when selecting retirement investments for clients.

Now climate change advocates are waiting to see what will happen with the proposed SEC climate disclosure requirements ruling expected in October. While Democrats have urged the agency to quickly finalise the rule, opponents say the SEC is overstepping its authority and it could be challenged before the supreme court.

This has given “the SEC a lot of pause to make sure that they finalise a rule that is going to withstand scrutiny from the judicial branch”, said Haedtler.

Regardless of the current ESG polarisation, Davis Noll thinks the SEC will “do the right thing” when it comes to the climate risk disclosure rules.

“The SEC is going to do what it needs to do to promote transparency and make sure that companies are taking account of the impact of their bottom line and telling their investors what they need to know,” she said.

Meanwhile, the Fed has announced it will release the results of its first climate stress tests at the end of the year but has not been very clear about its long-term goals regarding climate change risk. Haedtler attributes this to “the fear that exists around attracting more Republican congressional attacks”.

Overall, Haedtler believes the GOP pushback on ESG has led to both politicians and companies taking a more cautious stance on ESG, with the Biden administration pulling back rhetorically. Even S&P dropped its ESG score from debt ratings amid increased scrutiny, while Blackrock CEO Larry Fink has stopped using the term, saying it has become too political.

The future of ESG in the US

There are signs that GOP voters are growing tired of the “anti-woke” investing movement. While the majority of US adults think climate change is a major threat to the country’s well-being, there is a strong partisan divide. Nearly 78% of Democrats think climate change is a major threat compared to just 23% of Republicans, according to the Pew Research Center.

And while sustainable fund inflows fell during the second quarter of 2023 due to recession fears and political backlash in the US, ESG funds globally fared better than other funds during the same period. Even anti-ESG funds have lost steam, according to research firm Morningstar.

Republicans are also facing backlash from bankers, associations, insurance companies, and chambers of commerce that the legislation they are trying to pass is not only costly but goes against free market principles, said Haedtler.

This has “complicated their efforts” to pass anti-ESG legislation and led to “a very tenuous moment on the right around how this anti-ESG activity is going to play out”, he added.

Socially responsible investing “is not the critical race theory of 2023 and 2024 that Republicans were hoping it would be… forcing financial institutions to ignore real financial stability threats that the regulators have identified is not a popular approach,” Haedtler said.

Ultimately, it is important for investors to have more data around ESG, regardless of whether you are for or against it, said Paul Fahey, head of investment data science at Northern Trust.

“Any clarity and ability to look through the data and generate meaningful and intelligent insights from that data can only benefit the end investor,” he said.

While there is a big focus on regulators at the moment, in the end it will “be driven by the investors themselves”.

“[Investors are] the ones that are going to be demanding of the investment management firms to deliver against what they see is important to them from an ESG perspective,” he said.