ESG backlash in the US: what implications for corporations and investors?

Tima Bansal is a professor and Diane-Laure Arjaliès an associate professor at Ivey Business School

Action to block asset managers’ use of “green” filters in a growing number of US states reflects an escalating political backlash against mission-driven investment, with great relevance to students of business.

According to deal data provider PitchBook, 61 per cent of North American investors applied environmental, social and governance (ESG) criteria to at least part of their portfolio in 2022, up from 58 per cent in 2021.

But while many investors and fund managers want to use ESG frameworks to identify promising investments that also advance societal goals, some Republican lawmakers have argued they impose unnecessary constraints on corporations and undermine financial returns. At least 49 anti-ESG bills have been introduced across the US this year, according to the law firm Ropes & Gray. Twenty-two were introduced in 2022.

Politicians have accused asset managers including BlackRock, Vanguard and State Street of failing to honour their fiduciary duty. They argued that applying ESG to business decisions compromised financial returns, although the evidence is less clear-cut.

BlackRock, the world’s largest asset manager and a backer of ESG, was targeted by Republican state treasurers from Arkansas, Utah, Texas, Florida, Louisiana, Missouri, Arizona, North Carolina and West Virginia, who withdrew billions of dollars from its funds. Other states have threatened to follow. Florida’s Republican governor and presidential hopeful Ron DeSantis has accused corporations of using it to impose an “ideological agenda on the American people through the perversion of financial investment priorities under euphemistic banners”.

Last August, his home state required state pension funds to prioritise the highest return on investment without considering nonpecuniary factors.

However, such attacks have also faced resistance. The Indiana Bankers Association, which represents 116 banks, is lobbying against legislation that would require the state to divest and cancel contracts with financial groups that consider “social, political, or ideological” factors.

There is also debate on the symbolism versus the substance of such “anti-woke” moves. Researchers led by Shivaram Rajgopal at Columbia Business School recently concluded that the effect of three Texan public pension plans withdrawing from ESG funds was neither statistically nor economically significant. “The legislation appears to be political posturing and may serve no other purpose,” they wrote.

In March, Joe Biden vetoed his first bill: a Republican-led initiative to prevent pension fund managers from basing investment decisions on ESG. He argued the legislation “would put at risk the retirement savings of individuals across the country”.

Although some investment funds celebrated Biden’s decision, they have reconsidered ESG investments. Vanguard, the world’s second-largest asset manager, pulled out of the Net Zero Asset Managers initiative, a coalition of 301 investors committed to reducing greenhouse gas emissions. Its chief executive said Vanguard did not have the right to tell corporations in which it invested what to do and that its voice was being drowned out or confused.

Similarly, BlackRock removed the largest sustainable fund in the US from one of its popular portfolio allocation strategies. Investors did not react well, pulling $6.5bn from the fund, roughly a third of BlackRock’s overall assets, according to Morningstar.

Despite the acrimony in the US, the EU has pushed ahead with support for ESG. In January, it adopted the Corporate Sustainability Reporting Directive, which requires companies that operate in the EU or have listed securities in the bloc to disclose their ESG activities.

It mandated reporting not only by 50,000 companies based in the EU, but also their suppliers, including US-based companies.

Stephanie Turner provided additional research assistance.