By Competitive Intelligence Experts at Delve
Delve is a Washington, DC-based competitive intelligence and risk advisory firm helping highly scrutinized sectors anticipate and mitigate public affairs challenges. This piece was originally published in Delve’s TL;DR insights.
Here’s What You Need to Know
2022 witnessed a surge in red states restricting their ties with banks and divesting their pension funds from asset managers over what elected officials in those states view as financial institutions’ boycotts of certain industries, particularly fossil fuels. With 2023 underway, this trend is set to explode even further, with more aggressive scrutiny of banks, asset managers, and public companies over their ESG commitments and broader engagement on social and cultural issues.
This increased scrutiny is leading to increased policy action from both sides of the political spectrum, and it is not just financial firms who will be impacted. Many of today’s policymakers were swept into or kept in office by the twin tides of populism and progressivism, which both place greater focus on how corporations engage – or don’t engage – in an ever-widening range of contentious political and social issues. To stay ahead of these pressures, here’s what public affairs professionals need to know.
Conservatives Contend Banks and Asset Managers Are Boycotting Certain Industries – At the Same Time Progressives Expect Them to Do Just That
Earlier this month, Kentucky followed the lead of Texas, West Virginia, Oklahoma, and Florida by divesting from several major financial institutions over perceived fossil fuels boycotts. With 19 Republican states launching investigations into major banks over ESG and climate related investing practices last fall, more conservative states are likely to follow, encouraged by model legislation backed by a well-coordinated group of conservative think tanks, nonprofits, and advocacy groups. This crackdown extends to the treatment of other industries amid concerns “woke banks” and investors are disfavoring lawful but contentious businesses like gun manufacturers and private prisons. This year, a number of states, including Arkansas, Montana, Missouri, Oklahoma, Texas, and West Virginia, are taking up measures to restrict such discrimination.
While conservative states are pushing back on ESG-related investing, progressive states are pushing forward, urging financial institutions to give more consideration to such factors and using their own investing power to directly influence disfavored industries. For example, California, Maine, New Jersey, New York, New York City, and Rhode Island have taken steps to divest their pension funds from private prison companies. Connecticut, Nevada, New Jersey, New York, and Rhode Island, and others have considered similar steps with gun manufacturers. While progressives have long sought to starve fossil fuel companies of capital, a split has emerged among progressive state financial officers, with some states like Maine and Rhode Island advancing divestment of pensions from fossil fuel companies while others, such as Massachusetts and New York, prefer to remain activist shareholders pushing for more aggressive climate commitments.
While Conservatives Argue The Sole Interest Of Asset Managers Should Be Financial Returns, Progressives – And Some Investors – Contend That’s Exactly Why ESG Is Essential.
Since the start of the new year, policymakers in Arizona, Indiana, New Hampshire, and Virginia have introduced legislation requiring asset managers to focus only on their fiduciary duty to maximize returns. In Congress, both Senate and House Republicans have introduced similar measures, while legislators in Arkansas, Idaho, and South Carolina skip to the intended punchline, specifically restricting or banning state investments in ESG-focused funds.
Yet, ESG investors and advocates contend financial returns for shareholders is precisely why ESG is needed. Federated Hermes CEO Saker Nusseibeh argues, “The integration of ESG into the investment process, alongside stewardship, is the only way you can discharge your fiduciary duty.” Fourteen Democratic treasurers agree, publishing a letter last summer referring to conservative legislation as “short sighted,” and claiming companies that consider ESG factors are more resilient and successful. Some progressive states are taking steps to mandate ESG considerations in their investments, including Oregon, where policymakers could require incorporating “human rights analyses into investment decisions,” and Minnesota, where the State Board of Investments is considering a proposal to make its portfolio carbon neutral.
More States Are Raising More Questions About How ESG Ratings Are Calculated And Whether Formal And Informal ESG Considerations Violate The Law
As firms like Morningstar and S&P Global assign ESG ratings, policymakers question whether these scores drive a political agenda based on subjective factors, rather than objective financial metrics. These objections broke loudly into public discourse last spring when Utah’s treasurer launched an effort to get S&P Global to end its new state credit scores after the rating agency gave Utah a “moderately negative ESG score” despite its longstanding AAA bond rating.
Objections to these ratings are not just rhetoric. They are now driving consequential legal investigations at both the state and federal level. In August, Attorneys General from Missouri and 18 other states launched an investigation into whether Morningstar’s ESG assessments violate consumer protection laws, and Texas and other states have launched similar inquiries into S&P Global.
It’s not just formal ratings getting scrutiny, either. 19 states launched an investigation into U.S. banks’ involvement in various global climate initiatives. This growing scrutiny already led Vanguard – the world’s largest mutual fund issuer – to leave the Net Zero Asset Managers (NZAM) initiative. Likewise, Congressional Republicans warned major law firms they plan to examine whether legal advice to major corporations on ESG commitments violate federal antitrust laws, a similar question House Republicans will explore regarding companies “participating in voluntary, industrywide ESG initiatives” like NZAM.
Elected Officials Are Cracking Down On How Their Pension Funds Vote On Shareholder Resolutions – Or If They Have Deferred To Asset Managers And Proxy Advisors
Public officials are also beginning to scrutinize who is administering their pension funds. Recently sworn-in Kansas Treasurer Steven C. Johnson plans a “hard look at … who manages state pension funds.” Similarly, West Virginia Treasurer Riley Moore has proposed legislation to require managers of state funds “to come to the board for instruction on how to cast” votes related to ESG issues. States like Florida and Missouri have moved to revoke proxy voting authority associated with state funds, while last year the Massachusetts pension board approved proxy voting guidelines to allow “the state pension fund to vote against directors at companies that are not aligned with the Paris Climate Agreement and Climate Action 100+.” Federal regulators are also adding to this scrutiny. In August, the Securities & Exchange Commission (SEC) launched a probe into “whether managers of funds that are marketed as sustainable are trading away their right to vote on environmental, social and governance issues.”
As pension fund administrators come under scrutiny, so are the proxy advising firms on which they frequently rely, of which “just two proxy advisory firms – Institutional Shareholder Services (ISS) and Glass Lewis ⎼ control more than 97 percent of the proxy advisory market” and “make nearly 38 percent of all shareholder votes,” including on behalf of pension funds. Earlier this month, nearly two dozen red-state attorneys general sent a letter to ISS and Glass Lewis demanding they “defend their rationale for urging companies to adopt policies in line with environmental, social and governance goals.”
As Commerce Grows More Polarized and Politicized, Public Affairs Professionals Need a Playbook to Stay Ahead
It is tempting for banks and asset managers to respond to these ESG-related actions and proposals at a technical level focused on how they maintain sound investing principles that satisfy investors’ demands in today’s operating environment. In reality, however, the ESG debate is part of the broader cultural clash between progressive pressures to broaden companies’ social action and Republican populism that sees companies going “woke” and “question[s] whether or not the interests of Corporate America aligned with their own.”
This politicization of commerce puts business in a precarious position. The country is becoming increasingly polarized in its political and social issue demands on companies, and that makes it more difficult for them to take either side without facing consequences. Public affairs professionals need a playbook as they prepare for executive and legislative actions targeting their business and industry over ESG commitments. You don’t have to face these challenges alone. Here at Delve, we equip you with the competitive intelligence needed to have an information advantage.