The phase II of politicization of ESG in the US

A new phase of ESG’s politicization process has consolidated in the US, with attacks targeting the essence of the tool. ESG funds and financial institutions that have adopted ESG as an additional metric in investment selection are currently under attack.

Behind the attack are Republican Party (GOP) politicians who have embraced the usual guidelines and are testing their messages for the next electoral cycle. They have stated that there is no room for what they call “woke” or stakeholder capitalism. They believe that ESG disregards capitalism and the role of companies and attacks the American economy and individual economic freedom. According to them, it advances left-wing values and discriminates against specific industries, like fossil fuel and firearms.

The movement began with Republican governors who guided their treasury secretaries to withdraw amounts from state pension funds that were part of financial management institutions that used ESG to direct investments. Despite being hampered by contractual issues, BlackRock — whose CEO, Larry Fink, sent an open letter in 2021 to CEOs defending ESG and who is persona non grata among Republicans — has already lost assets from Republican-controlled states of $4-5 billion. However, at the last meeting in Davos, Larry Fink said that, on the other hand, the company had captured around $230 billion in investments in the US last year.

More recently, Republicans incorporated a legislative aspect to their strategy at the state and federal levels. Some 15 states are considering or have already approved bills that include guidelines ranging from the withdrawal mentioned above of state resources from financial institutions that have adhered to the logic of ESG to laws that oblige companies seeking to enter into contracts with state entities to attest – as a condition for doing business – they will not engage in boycotts against fossil fuel companies or discrimination against firearms during the term of the contract. A Florida bill has even included a guideline prohibiting banks that have an activist agenda from being depositors of state funds. At the federal level, the House of Representatives recently approved a decision canceling a Labor Department rule that would allow pension fund managers to also invest in ESG funds – for Republicans, the only factor should be to maximize shareholder return; in this case, the pensioner. President Biden vetoed the decision, but legal action filed by 25 states led by Republican governors against the Labor Department’s rule has kept the issue wide open.

One of the leading proponents of the anti-ESG agenda is Florida’s GOP governor and potential US presidential candidate Ron DeSantis. In a recent tweet criticizing President Biden’s veto, DeSantis wrote: “Biden’s veto is why I formed an alliance of freedom-loving states to combat the threat posed by ESG. Now with Virginia, our 20-state coalition will protect our citizens against powerful economic actors using their financial might to impose an ideological agenda.”

The US continues to be the incubator of new ideas, both good and bad, imported by Brazil. A recent article from “Folha de S. Paulo” listed 69 anti-transgender bills in Brazil, from forbidding neutral language in schools and public administration buildings to prohibiting unisex toilets in public and private facilities. They also include proposals seeking to prevent the access of trans children and teenagers to puberty-blocking medicines and hormones. Bills in this line have been around for years in the US. In fact, Arkansas was the first North American state to pass an anti-transgender law in 2021. They result from Phase I’s attack on the principles behind the “S” on ESG. So it should not be surprising if Phase II of direct attacks on ESG investments eventually lands in Brazil.

The articles presented herein do not necessarily reflect Aberje’s opinion; its content is the author’s sole responsibility.

RENARD ARON

Senior Affiliate Consultant at Prospectiva Public Affairs