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Industry Concerns Help Drive Restrictions on ESG Investing

Citing political interference from investment firms, legislators in red states continue to restrict a set of investment considerations known as environmental, social and governance (ESG).

Worker on an oil drilling rig set up in the Permian Basin oil field in Stanton, Texas.
Workers on a rig in the Permian Basin in Texas. A state law barring ESG led the Board of Education to withdraw billions from a financial firm that shuns the industry.
Joe Raedle/TNS
In Brief:
  • Continuing a recent trend, red states have made ESG bans a priority with almost a hundred bills introduced in the first quarter of 2024.

  • Legislators are working in conjunction with the energy and firearm industries, as well as conservative think tanks concerned about financial firms pushing a social justice agenda.

  • ESG proponents say it represents important considerations regarding long-term economic sustainability and that banning it runs contrary to the free market.

  • So far this year, legislators in at least 22 states have introduced about a hundred bills focused on ESG, the rubric of investment considerations known as environmental, social and governance. Nearly all the bills would ban or otherwise restrict government funds from taking ESG into account.

    Ben Watkins, director of the Florida Division of Bonds, says this legislation stems from ESG being seen as “a political statement about where [people] are on the political spectrum.”

    The 20 states that have passed some form of anti-ESG legislation since 2021 are ruled by Republicans. In several cases, these restrictions have led to divestment, with states pulling millions of dollars out of investment firms such as BlackRock. The largest divestment so far is in Texas, where the state’s Board of Education pulled $8.5 billion of investments to comply with a 2021 bill prohibiting state investment in companies that avoid energy companies. Louisiana ($794 million), Arizona ($543 million) and Florida ($2 billion) have also pulled their investments to comply.

    Connor Gibson, senior adviser to the progressive research group Pleiades Strategy, describes tracking “hundreds of bills at the state level” and finding only two or three Democratic co-sponsors. “It’s pretty easy to conclude that this is Republicans taking cues from these culture war groups,” Gibson says, alluding to conservative think tanks such as the Texas Public Policy Foundation, the Heartland Institute and the American Legislative Exchange Council, which creates model policy that he believes serves as the basis for some of the anti-ESG legislation across the country.

    When it comes to blue states, only a handful such as California and Illinois have proposed or passed legislation that attempt to protect or mandate some aspect of ESG. These laws are usually focused on environmental emissions or clean energy. In 2015, California passed a bill that required the state’s pension systems to “divest the public employee retirement funds of any investments in a thermal coal company.” Last year, Democratic Gov. Gavin Newsom signed legislation to require companies doing business in the state to make climate disclosures around emissions and risks mandatory.

    The Concerns About ESG

    Many Republican legislators see ESG as a way for financial firms to inject social justice concerns into their decision-making, thus politicizing investment. The two main areas of concern are energy companies and firearm manufacturers. Following the Texas Board of Education’s divestment from BlackRock, Aaron Kinsey, its chair, said that “BlackRock’s destructive approach toward the energy companies that this state and our world depend on is incompatible with our fiduciary duty to Texans.”

    In 2023, Florida GOP Gov. Ron DeSantis signed two bills restricting pension investments and banning ESG scores in Florida, After that, Lawrence G. Keane, senior vice president for a national firearms industry association, expressed gratitude toward DeSantis and legislators who “worked diligently to protect industries that are wrongfully denied essential financial services simply because ‘woke’ Wall Street banks politically disagree with them.” (The firearms industry, which employs nearly 10,000 people in Florida, is responsible for a total economic impact of $4.7 billion in the state.)

    ESG supporters — who range from progressive environmental groups to pension fund managers and some state treasurers — view these considerations as a way to manage risk and invest sustainably. Washington State Treasurer Mike Pellicciotti avoids the term entirely. For him, what matters are the long-term factors that could impact return on investment.

    “To me, this anti-ESG movement is contrary to the free market, contrary to good investment management,” Pellicciotti says. “It’s important to make sure that we’re highlighting how that different course is not in the best interests of investors.”
    Zina Hutton is a staff writer for Governing. She has been a freelance culture writer, researcher and copywriter since 2015. In 2021, she started writing for Teen Vogue. Now, at Governing, Zina focuses on state and local finance, workforce, education and management and administration news.
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