What is ESG

ESG stands for environmental, social, and governance criteria in investing. It refers to a strategy of evaluating a company outside of traditional metrics, by taking into account how a corporation (1) interacts with the environment, like its contribution to air pollution; (2) takes care of its employees, suppliers, distributors, and customers; and (3) governs itself, like its pay ratio and political contributions.

Investment firms may exclude companies from ESG-focused portfolios if the company is involved in the fossil fuel industry, if the company manufactures firearms or military weapons, if the company has a poor human rights or animal welfare record, or if the company has only white or male members on its board of directors, for example.

The approach has increasingly come under attack from conservative lawmakers who claim that allowing pension funds to consider ESG criteria puts millions of Americans’ retirement savings at risk. In fact, a new study commissioned by the nonprofit Sunrise Project found the exact opposite: legislation and executive action in six states to ban ESG investing cost taxpayers as much as an estimated $708 million in higher interest payments over the past year.

A separate study by Wharton Business School professor Daniel Garrett and Federal Reserve economist Ivan Ivanov found that Texas’ 2021 law requiring public pensions to divest from financial companies that “boycotted” fossil fuels raised costs to the public by as much as $532 million in its first eight months.

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Congress’s anti-ESG bill

Republicans in the U.S. House of Representatives introduced a resolution last month to block a Department of Labor rule allowing retirement plan managers to use ESG factors in making investment decisions.

As one of his first acts in office, President Biden issued an executive order directing agencies to revise any regulations, orders, or guidelines issued during Trump’s administration that fail to address climate change, empower workers, and protect public health. The Department of Labor accordingly issued a rule “that allows plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights” in November 2022, undoing a Trump era regulation that prohibited ESG considerations.

“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”

The Republican-led resolution, H.J.Res.30, uses the Congressional Review Act (CRA) to overturn the ESG rule. CRA allows Congress to repeal a final rule issued by a federal agency within 60 legislative days of its going into effect. H.J.Res.30 is sponsored by Rep. Andy Barr (R-KY) and co-sponsored by 119 other House Republicans. Barr has repeatedly sought to curb consumer protections and deregulate the banking industry.

All 215 Republicans voted in favor of H.J.Res.30, with one Democrat joining: Rep. Jared Golden of Maine.

The bill then moved to the Senate where it passed 50-46 on March 1 with the assistance of two Democrats: Sens. Joe Manchin (WV) and Jon Tester (MT).

Tester: “At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible. I’m opposing this Biden Administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”

Manchin: “I’m proud to join this bipartisan resolution to prevent the proposed ESG rule from endangering retirement incomes and protect the hard-earned savings of American families. I encourage my colleagues on both sides of the aisle to support this important resolution to ensure Congress is promoting economic security for West Virginians and Americans, not further exacerbating the serious economic challenges they are already facing.”

H.J.Res.30 now heads to Biden’s desk, though he has promised to veto it.’

It is also worth noting that some of the lawmakers leading the charge against ESG investing have accepted large donations from the very financial companies they accuse of mishandling investments. House Financial Services Chairman Patrick McHenry (R-NC), who advanced Congress’s anti-ESG bill, has taken $140,000 from BlackRock, Vanguard, and State Street. Rep. Bill Huizenga (R-MI), who leads an anti-ESG working group in Congress, accepted $51,000 from the same three corporations. Sen. Jon Tester (D-MT), who voted for the anti-ESG bill, has accepted $39,000 from the companies, as well.

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State anti-ESG bills

The majority of state rules banning or limiting state pension fiduciaries from using ESG criteria has been conducted by executive offices rather than legislation. For example, the Arizona State Treasurer’s office implemented regulations last year specifying that state investment programs may not consider “non-pecuniary factors,” including any agreements related to “environmental or social goals” or “corporate governance structures based on social characteristics.”

• Within the ESG conversation, “pecuniary factors” are defined as factors that a fiduciary “prudently determines” are expected to have a “material effect” on the risk or return of an investment. Generally, this excludes social and environmental justice issues.

Similarly, Florida, Indiana, and Kentucky executive offices/agencies also banned ESG investing last year.

This year’s legislation prohibiting government entities from awarding contracts based on ESG criteria: Arkansas’s HB1049, Iowa’s HB653, Kansas’s SB224, Missouri’s SB177, and Texas’s SB177.

Another type of anti-ESG legislation that targets companies that allegedly “boycott” or “discriminate” against industries disfavored by the ESG movement has been more popular among state lawmakers. Kentucky, Oklahoma, Texas, and West Virginia enacted legislation last year that requires state regulators to maintain a blacklist of financial entities that “boycott” energy companies. “Energy-producing states,” Kentucky’s SB 205 declares, “should avoid doing business with companies that are attacking the industries that substantially contribute to their state budgets.”

This year’s legislation prohibiting government contracts with companies deemed to be “boycotting” industries disfavored by ESG proponents (e.g. fossil fuels and firearms): Idaho’s HB189, Oklahoma’s SB15, South Carolina’s HB3564, and Utah’s 97.