The months-long standoff between Republican officials and asset managers over environmental, social and governance investing deepened this week, as South Carolina announced plans to pull $200 million out of funds run by BlackRock, the nation’s largest asset manager. This comes less than a week after Louisiana announced a $794 million divestment from the firm.
Their reasons for pulling out? Much like Texas and West Virginia this summer, they cite the impact of ESG on BlackRock’s energy investments.
“Simply put, we cannot be party to the crippling of our own economy,” said Louisiana Treasurer John M. Schroeder, affirming his belief that further investment in BlackRock’s funds would harm Louisiana residents in the long run. Other states that produce fossil fuels have echoed these sentiments, while still more point out that ESG funds are merely repackaging left-wing social views. Republican congressmen have called for transparency over how ESG ratings are established.
GOP leaders are right to call out the progressive infiltration of the investing world. But banning specific investment firms based on flimsy evidence doesn’t help depoliticize investing and could hurt state retirement plans’ bottom lines.
States looking to combat the progressive social agenda that has taken root in ESG investment policies should look to Florida, which has barred ideological factors from state-run investments while respecting individuals’ right to invest as they choose.
In August, the attorneys general of 19 right-leaning states signed on to a letter to BlackRock CEO Larry Fink, alleging inconsistency in the investment firm’s public statements on its climate agenda and accusing it of deprioritizing clients’ interests.
Texas, the biggest signatory, went further, barring state entities outright from holding shares of 10 financial firms (including BlackRock) and 350 funds that the state comptroller deemed to boycott oil and gas companies. Some of these claims of boycott are poorly evidenced: BlackRock itself invested more than $100 billion in the energy sector in Texas alone. The plan also comes with a whiff of protectionism, favoring one of Texas’s biggest industries while ignoring the real problem of ideological intrusion into ESG processes.
This seems especially unnecessary as free markets are already poised to punish so-called energy boycotters. As post-COVID markets have seen a slump in the ESG-friendly tech sector and a bull market in the “dirty” energy sector, the financial tradeoff between ideology and straightforward, returns-focused investing has become more stark. Texas’ move in this direction will simply reduce investment options for state plans while doing little to tackle ESG’s biggest flaws. With states like Louisiana and South Carolina following suit, this may unfortunately become the normative GOP response.
Florida — which was conspicuously absent from the state attorneys general’s letter — has taken a more promising path. In late August, Gov. Ron DeSantis amended the Florida pension plan’s investment policy to affirm that the plan is meant to provide financial return for state employees. His resolution limits investment decisions to pecuniary factors — namely, factors that the board expects “to have a material effect on the risk and return of an investment.”
The resolution notes that these factors “do not include the furtherance of social, political or ideological interests,” and that the investment board cannot sacrifice return or increase risk “to promote any non-pecuniary factors.”
In a world where asset managers exclude industries like firearms to appease progressives — a policy that some industry publications claim to be a virtual requirement of an ESG process — this is a welcome breath of fresh air.
Though Gov. DeSantis is often charged in his rhetoric, this is actually a tempered approach. He has wisely eschewed funneling state funds towards ideological investments, without precluding all consideration of environmental or governance factors when they materially affect the investment’s risk-return profile — a fact ignored by many of his critics. Nevertheless, it would keep blatantly political rules — such as the ban on firearms — from affecting their portfolios.
Asset managers’ attempts to rebut GOP criticisms are muddled at best. Their marketing often presents ESG as making positive change in the world from what always seems to be a progressive perspective, paired with terminology like “sustainable” or “socially responsible.” When faced with criticism, they insist instead that ESG is simply the analysis of investments’ environmental, social and governance factors to reduce portfolio risk or increase returns. Though the latter description may reflect the movement in its earlier history, it’s undeniable that progressive political agendas have flavored the latest ESG trends.
Despite proclamations that 2021 was the year of ESG and that the next year would bring even greater heights, 2022 actually saw record outflows from such funds. With the market’s skepticism of ESG already increasing, it’s best to let the market do its job holding it accountable while keeping state funds out of ideological investment vehicles.
Mike Viola is the head of analytics at the Foundation for Economic Education (FEE). He previously spent five years in investment research, helping create one of the first databases of ESG and values-based investments. Find him on Twitter: @mf_viola.
The author is with the Foundation for Economic Education