Green Finance, Member Exclusive

Green Finance Briefing: ESG giving rise to a new political divide

  • ESG is now at the center of a political divide in the US, as Democrats are pushing for policy change while Republicans question their methodologies and intentions.
  • We also look at the rise in federal climate spending, and John Oliver's new episode that explores the topic of greenwashing.
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Green Finance Briefing: ESG giving rise to a new political divide

In the US, the topic of ESG is drawing political battle lines between Democrats and Republicans. These three letters, an unfamiliar acronym to the wider public not too long ago, are now at the center of a new political divide. 

Those on the left feel that ESG is not really about sustainability, but about enterprise value creation. Meanwhile, the right looks at the ESG movement as investors trying to impose a social agenda that hurts companies' profitability.

"Many Democrats see ESG as an opportunity to pursue desired social change through collective action in the form of democratic capitalism. Most Republicans view the ESG movement as an offshoot of the Green New Deal and therefore akin to thinly-veiled Marxism. While there may be some truth to both views, neither accurately reflects marketplace and regulatory developments over the past quarter century," argue researchers Daniel Crowley and Robert Eccles in a paper

The Biden administration has had a strong focus on climate change. Shortly after the election, the SEC started looking into adopting disclosure standards for material ESG risks. Earlier this year, the Commission issued a proposal on climate change disclosures, which received over 5,000 comments from folks all across the spectrum – some thought it wasn't enough, while others thought it was too much. 

The GOP has also been reacting to this new climate-focused agenda. Back in May, former Vice President Mike Pence wrote an op-ed entitled "Republicans can stop ESG political bias" on how ESG is being used by the "woke left" who wants to "conquer corporate America".

A few weeks later, 131 of 211 House Republicans signed a letter to the SEC Chair Gary Gensler that demanded for the climate proposal to be revoked.  

And now, more Republican states are taking action against financial companies that are responding to public pressures and divesting from fossil fuel assets. 

In Texas, the state comptroller issued a list of financial companies that "boycott" the fossil fuel sector, including BlackRock (interestingly, the only US-based company on the list), BNP Paribas, Credit Suisse and UBS, among others. This move requires state pension funds to divest from these companies.

BlackRock responded, with head of US Mark McCombe noting that the company is the largest investor in the state's oil and gas industry, having invested $290 billion in Texas-based assets. McCombe made multiple lobbying trips to Texas while the list was being drawn up, but to no avail, the FT reported.

"Trying to stop a US company from doing business in its own backyard is bad for business. It looks opportunistic in this climate. We have never turned our back on Texas oil and gas companies. This is anti-competitive," he said. 

In Florida, Governor Ron DeSantis banned the state's $186 billion pension fund from investing in ESG assets. DeSantis told a State Board of Administration meeting that ESG policies "are dead on arrival in the state of Florida."

And West Virginia will no longer award state contracts to JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley and BlackRock because of the companies' decarbonization targets that require them to reduce financing to coal companies.

The common denominator to be drawn here is that states that are heavily reliant on fossil fuels are not prepared to transition to a clean energy economy, which is the direction being set by Washington. 

The fear of change is understandable, and politicians are wasting no time to capitalize on it. They paint the winds of change as an enemy, although change is inevitable.  

However, what is not being adequately talked about is that the shareholder profits that Republicans are so keen to protect don't actually reflect the true cost of doing business. Democrats also have a massive PR problem – if you're leading the change, there must be adequate communication and transparency. 

My personal view was best summarized by Crowley and Eccles in their paper:

"Sustainability is not new, nor is it mainly about scoring social justice warrior points. Rather, it is about what regulations are necessary to ensure that the assumption of risk by investors is adequately informed".

Chart of the week

Source: Public Tableau

What we're writing

Could the US climate bill be the push the system needed?

The climate bill could catalyze a pivotal moment for the financial services industry to view the clean energy sector as one of opportunity rather than compromise.

"Look under the hood": The difference between ESG and sustainable investing

As ESG investing is becoming increasingly popular and flooded with bad actors, investors are growing wary of greenwashing and overwhelmed by the flurry of options.

The Green Finance Podcast Ep. 7: Connecting capital to sustainable projects with Trenton Allen, CEO of Sustainable Capital Advisors

Climate change awareness is growing, and it's starting to bring more capital along with it. But the ecosystem is still new, and many connections are yet to be made.

Video of the week

https://www.youtube.com/watch?v=6p8zAbFKpW0

What we're reading 

China is beating the U.S. in clean energy. Can America catch up? The race in five charts

With his anti-ESG fund, Vivek Ramaswamy takes a page from the Infowars playbook

World Bank's IFC taps blockchain for carbon offsets

Debt issuers wonder if ESG label is worth it as skepticism spreads

WSJ Opinion: The ESG investing backlash arrives

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