By David Gelles
It’s been a widely accepted trend in financial circles for nearly two decades. But suddenly, Republicans have launched an assault on a philosophy that says that companies should be concerned with not just profits but also how their businesses affect the environment and society.
More than $18 trillion is held in investment funds that follow the investing principle known as ESG — shorthand for prioritizing environmental, social and governance factors — a strategy that has been adopted by major corporations around the world.
Now, Republicans around the country say Wall Street has taken a sharp left turn, attacking what they term “woke capitalism” and dragging businesses, their onetime allies, into the culture wars.
The rancor escalated Tuesday as Republicans in Congress used their new majority in the House to vote by a margin of 216-204 to repeal a Department of Labor rule that allows retirement funds to consider climate change and other factors when choosing companies in which to invest. In the Senate, Republicans are lining up behind a similar effort that has been joined by Sen. Joe Manchin, D-W.Va.
The Capitol Hill strategy has pulled President Joe Biden into the fray, with the White House saying Biden will veto any bill to overturn the rule.
As if to underscore the issue’s sudden visibility, former Vice President Mike Pence let loose on Twitter on Tuesday. “Disappointing that President Biden is putting ESG and woke policies above hard-working Americans’ retirement accounts!” wrote Pence, a potential 2024 candidate for the White House. “We will keep fighting until we put a stop to ESG once and for all!”
ESG investing has been routine on Wall Street for years. Most major companies issue extensive reports about their efforts to combat climate change and commitment to workplace diversity.
But in recent months, conservatives have increasingly attacked the practice, arguing that it promotes liberal priorities ranging from renewable energy to the Black Lives Matter movement.
And while ESG applies to everything from diversity among corporate leaders to corruption controls, it’s the “E” in ESG — the idea that the private sector needs to consider its impact on the environment — that has emerged as the top target of Republicans.
Officials in Republican-led states argue that it would lead to disinvestment in fossil fuel companies that provide tax revenue and jobs in their states, making it a top target of right-wing commentators and politicians.
The Labor Department rule is likely to remain on the books, as Republicans do not appear to have the votes to overturn a promised veto.
But the House vote Tuesday was just the start of what’s expected to be a lengthy campaign against ESG.
Already this month, Rep. Patrick McHenry, R-N.C., who leads the House Financial Services Committee, announced the formation of a “Republican ESG Working Group.” Republicans plan hearings this year at which conservative lawmakers are likely to grill executives from some of the nation’s biggest banks on their views about climate change, social issues and more.
There are some indications that the conservative pushback is gaining traction. Vanguard, one of the world’s largest investment firms, recently withdrew from the Net Zero Asset Managers initiative, an effort intended to get institutional money managers engaged in the fight against climate change.
BlackRock, the world’s largest asset manager, has been going out of its way to remind politicians that it still invests in fossil fuel industries, even as it supports efforts to reduce planet warming emissions.
“We are seeing major companies respond to this political pressure,” said Rep. Sean Casten, D-Ill., who last month helped start the House Sustainable Investing caucus and who is a proponent of ESG investing.
Even before Tuesday’s vote on Capitol Hill, the Labor Department rule had drawn a legal challenge from 25 Republican attorneys general, led by Ken Paxton of Texas.
As the Securities and Exchange Commission considers a new rule that would require corporations to disclose their carbon emissions, industry groups and Republican lawmakers have been pushing to limit its scope.
Around the country, Republican state treasurers have been withdrawing billions of dollars from firms like BlackRock that they deem “woke.”
And Vivek Ramaswamy, a conservative business owner and commentator, has created what he considers an apolitical investment firm, Strive Asset Management, positioning it as an alternative to BlackRock. Ramaswamy recently announced he was running for president on what is effectively an anti-ESG platform.
To the ranks of wonky risk management professionals who have toiled over the minutia of ESG reports for decades now, the political fracas is perplexing.
“Until very recently it was both obscure and also just accepted as a general part of investing,” said Josh Lichtenstein, a partner at the law firm Ropes & Gray who is tracking the ESG backlash.
The term ESG was first introduced in a 2004 report prepared by the United Nations and 20 financial firms including Goldman Sachs, Morgan Stanley and UBS.
As more companies began talking about their efforts to combat climate change and improve diversity, the issue was pushed to the forefront of the corporate agenda. Among the loudest proponents of ESG has been Larry Fink, the CEO of BlackRock, who has called on companies to reach beyond profit statements to consider the role the private sector could play in addressing societal problems.
That advocacy has made him a target of scathing critiques from conservative commentators and politicians, as well as dark conspiracy theories.
“For the first time in my professional career, attacks are now personal,” Fink said at the World Economic Forum’s annual meeting in Davos, Switzerland, last month. “They’re trying to demonize the issues.”
The current ESG backlash can be traced to Texas, where in 2020 oil executives began complaining that big banks like JPMorgan had stopped lending them money.
Republican legislators in Austin, Texas, as well as officials at the Texas Railroad Commission, the state’s energy regulator, took up their cause.
“If ESG is not put in check, not only will future retirees face challenges in the years ahead, but we could see record bankruptcies and layoffs in the energy sector,” Wayne Christian, one of the railroad commissioners, said in 2021.
That year, Gov. Gregg Abbott signed a law prohibiting the state from contracting with or investing in any business that was “boycotting” fossil fuels.
It is unclear whether applying environmental and social principles to investing is actually good for business. Some studies have shown that companies that embrace environmental and social goals outperform their peers in the long run. But other studies show the opposite. And as the stock market slumped last year, oil and gas stock prices rose sharply.
Another point of contention is that ESG rankings, which are compiled by companies like S&P Global, arrive at sometimes counterintuitive conclusions about which companies are doing the most for the environment and society.
Last year Elon Musk lashed out after Tesla, his electric car company, was ousted from a major ranking of companies with the best ESG scores, while Exxon Mobil, one of the world’s biggest oil producers, was included. “ESG is a scam,” he wrote on Twitter. “It has been weaponized by phony social justice warriors.”
Sen. Sheldon Whitehouse, D-R.I., said he believed the Republican position on ESG was more about ginning up outrage than about just how much of a financial risk climate change posed to long-term investments.
“They invent culture-war provocations that drive clicks, and woke capitalism is part of that,” he said.