Conservatives have long held that the government should avoid interfering with private business decisions. But over the last two years, Republican state treasurers and attorneys general in Texas, Florida and other states have sought to blacklist banks that factor climate risks and social concerns into their investment decisions.
In Republican strongholds such as North Dakota, Indiana, Mississippi and Kentucky, state lawmakers have recently defeated proposals that would prohibit state governments or pension funds from doing business with the big financial institutions that have adopted ESG — environmental, social and governance — goals and policies.
In North Dakota a pair of proposed laws went to crushing defeats with one losing by a 90-3 margin on Feb. 1. They were shot down, in part, by arguments that these proposals contradicted conservative principles.
“Our biggest concern is the idea of somebody telling our banks who to do business with or who not to do business with,” Rick Clayburgh, chief executive of the North Dakota Bankers Association, said after beating back those proposals. “We believe our banks should be allowed to do business with customers they know, the people they know and to make those decisions.”
North Dakota lawmakers may still approve less strident versions of the legislation, but those would simply put into law current practices, such as avoiding social investing, according to testimony from the state’s retirement and investment board director.
Across the country, the battle rages over sustainable investing, with more than $500 billion pouring into climate and socially conscious investments in 2021, according to JPMorgan Chase.
Conservative groups have sought to use public pension plans and state and local bond offerings to freeze out selected financial institutions. Those groups say they are simply trying to counter the injection of “woke” values into Wall Street investment decisions.
But big banks and asset managers supportive of ESG — including BlackRock, JPMorgan Chase, Citigroup and State Street — say their strategies are being mischaracterized amid the larger culture wars of the day. They say it makes financial sense to factor climate risks and other societal concerns into investment strategies.
More and more, big and small banks are winning that argument on the state level, despite a national effort by conservative dark money groups — nonprofits that don’t have to disclose their donors — to blacklist climate-friendly businesses.
Many of these state laws were inspired by the American Legislative Exchange Council, a conservative group that draws up model legislation for state legislators. But ALEC said its board had recently withdrawn its prototype and sent it back to its energy task force “for further discussion.” The initial version, the Eliminate Economic Boycotts Act, would have required states to stop doing business with companies deemed to be “boycotting” loans or investments in fossil fuel or firearms industries.
“We’re starting to see rather large cracks appearing” in the anti-ESG movement, said Frances Sawyer, the head of a San Francisco-based strategic planning firm called Pleiades Strategy who served as a policy adviser to former California governor Jerry Brown (D) and Tom Steyer, a climate investor and philanthropist. “The whole idea of blacklisting institutions just isn’t it when it comes to free market principles. It feels like government overreach.”
Conservative groups say they are not alarmed. Will Hild, executive director of Consumers’ Research, a Washington-based organization fighting ESG policies nationwide, said that his group is not “back on its heels” and said he hopes that between five and eight states pass one of his group’s bills this year. “That would be a huge year,” he said. “I’m not expecting overwhelming victory in one year.”
On Jan. 26, half the country’s state attorneys general filed a lawsuit against the Labor Department over a regulation that gives money managers greater freedom to consider environmental, social and governance factors when selecting investments.
On Tuesday, the Republican-controlled House voted 216-204 to limit the latitude of money managers who want to factor ESG into account when investing the Labor Department’s large pensions. The effort may be moot, however, since Senate Democrats are expected to block it.
ALEC also said it is pushing forward. “State legislators are rightfully concerned with radicalized ESG,” the group said in a statement, adding that it seeks to address “politically motivated investment strategies that have contributed to severe underfunding in state pension plans across the country.”
In North Dakota, one big backer of anti-ESG legislation is state Rep. Bill Tveit, a Republican from Hazen who has been quoted as calling sustainable governance “a worldwide human satanic organized effort.” In an interview, he acknowledged the banking industry was upset by the original bill but is confident that an amended version can be enacted. He added that ESG proponents “want to control every inch of our lives while enhancing their fantasy green world.”
While conservative groups have talked largely about taking on the half dozen or so biggest banks and asset managers — firms such as JPMorgan Chase, Citigroup, BlackRock and State Street — many of the firms that would be hit include community banks.
“I believe it infringes on a private business’s right to choose who they do business with,” Lise Kruse, North Dakota’s commissioner for financial institutions, said in written testimony about the initial draft legislation.
The current version, which awaits state Senate action, dropped provisions that would have permitted boycotts and the blacklisting of financial institutions, Kruse said in an email to The Washington Post.
Opposition from the American Bankers Association (ABA) has contributed to the rash of setbacks. The ABA said through its Banking Journal that ALEC’s model proposal “undermined the organization’s own commitment to free markets and limited government.” The ABA said that “government should not be dictating business decisions to the private sector.”
In Kentucky, the state treasurer, Allison Ball, in January drew up a list of 11 financial institutions she said should not do business with the state because they were engaged in boycotts of energy companies. But in a letter to Ball, the board of the $10.8 billion Kentucky County Employees’ Retirement System said that it would not divest from firms like BlackRock because doing so “would be inconsistent with our fiduciary duty.”
Retaining competition is one reason state and local officials are hesitant to blacklist financial firms. Fewer competing institutions can be costly to state pension funds and municipal bond managers seeking the highest returns for their money.
The Indiana Public Retirement System estimated that a bill limiting the portfolio managers could slash investment returns from 6.25 percent a year to 5.05 percent, costing state pension funds $6.7 billion over the next 10 years.
In 2021, Texas Gov. Greg Abbott signed laws that barred municipalities from dealing with banks that restrict funding to fossil fuel or firearms companies. That led to the abrupt exit of five of the largest bond underwriters, costing the state between $300 million and $504 million, according to a paper co-authored by Daniel Garrett, a professor of finance at the University of Pennsylvania’s Wharton School, and Ivan Ivanov, an economist at the Federal Reserve.
“Banks do leave the market,” Garrett said. “And Texas borrowers wind up paying a little more than they would.”
Overall, Texas state and municipalities raised $31.8 billion during the eight months after the exit of five of the biggest underwriters and Texans ended up paying 0.14 percent more than they would have, Garrett and Ivanov said.
On the other hand, Garrett said, many Texas municipalities began to forge new relationships with their lenders and costs began to decline. “It’s not clear if the increased cost was a short-run phenomenon,” he said.
As the debate continues on the financial costs of anti-ESG legislation, conservative-leaning groups have been hopping from state to state to seek more such laws.
In mid-February, an Arizona statehouse committee heard Eric Bledsoe, a senior fellow at the Foundation for Government Accountability, — testify that ESG “lines the pockets of political operatives” and that public pension funds were “not the play things of activist speculators.”
Bledsoe, who has championed anti-ESG policies in several states, formerly worked at the U.S. Chamber of Commerce Foundation and Charles Koch Foundation.
A month earlier, state legislators heard testimony from several anti-ESG groups, including Reliable Energy, a public relations agency for coal interests, and Bette Grande, former chair of ALEC’s energy division and state government relations manager at the Heartland Institute, a group that has rejected the science of climate change and policies to address it.
But in mid-February, Arizona Attorney General Kris Mayes (D) said the state would no longer investigate financial institutions’ ESG policies. “Corporations should be permitted to access capital markets in ways that they feel are necessary for the advancement of their investor objectives and for society,” Mayes said.
On Feb. 13, Florida Gov. Ron DeSantis (R) announced legislation he said would protect Floridians from the “woke environmental, social, and corporate governance (ESG) movement.” DeSantis, who has been harping on the dangers of woke-ism, said that “by applying arbitrary ESG financial metrics that serve no one except the companies that created them, elites are circumventing the ballot box to implement a radical ideological agenda.”
DeSantis along with his allies, Florida’s state chief financial officer Jimmy Patronis and the state Attorney General Ashley Moody, all sit on the nearly $218 billion Florida State Board of Administration.
Republicans are divided over the role of government when it comes to ESG issues. “It’s not really a natural fit for Republican politicians,” said Joshua A. Lichtenstein, a lawyer and ESG specialist with the firm Ropes & Gray. He said there was a tension “between somebody traditional for free markets versus someone from the anti-woke movement.”
“I think he’s absolutely right that the wokeness is really invading this culture in a very negative way,” New Hampshire Gov. Chris Sununu (R) said about DeSantis in an interview on CNN. “Now, where we might disagree is: Should the government come in and fix woke? Well, the government is never useful at coming in and fixing a cultural issue.”
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