The polarized political environment facing asset managers in the US regarding environmental, social and governance issues was on full display during a June 6 House hearing.

Republicans and Democrats clashed over issues such as fossil fuels and renewable energy during a joint congressional hearing for two subcommittees of the House Oversight and Accountability Committee held to examine the "cascading impacts of ESG compliance."

Those on the right argued that asset managers are putting ESG goals over profit, thereby risking Americans' retirement money. Those on the left said such considerations lead to more responsible investing and greater protection for consumers.

The hearing came as state regulators across the US both restrict and encourage ESG investing while sending mixed signals to financial institutions across the globe.

The war on 'woke'

The opposition to ESG investing is growing in the US, particularly among Republican legislators who claim environmental, social and governance considerations are a "woke" way to manipulate markets and advance a leftist political agenda.

"Due to Democrats' ESG push, asset managers are prioritizing ESG goals over profit and risking Americans' hard-earned money," Rep. Pat Fallon (R-Texas), who also serves as chairman of the subcommittee on economic growth, energy policy and regulatory affairs, said during the hearing.

Fallon said ESG is being utilized to "rewrite the fabric of America with woke policies" and further lamented that such investing strategies have tasked businesses with accounting for their carbon footprint as well as that of their suppliers and contractors, and on the race and gender of their corporate boards instead of focusing on issues such as merit and performance.

"These are all factors that ... dominate asset managers and woke corporate board rooms as much if not higher than the actual returns that the business provides to shareholders," Fallon said.

Republicans also criticized a rule that the US Department of Labor finalized in November of 2022 that gives fiduciaries of retirement plans the right to consider ESG risks as they make investment and proxy voting decisions.

An 'uncomfortable truth'

On the flip side, Democrats argued that ESG principles are designed to protect investors from financial risk.

During the hearing, Rep. Cori Bush (D-Mo.) said such factors have "material and defining benefits" on companies' bottom lines, adding that responsible investing "depends on ESG data," which helps to plan for long-term challenges.

"Companies that face and responsibly address this reality carry less risk both for themselves and for society overall," Bush said. "Companies that deny this reality and pretend their actions don't have consequences are not only delusional, they are dangerous."

Rep. Katie Porter (D-Calif.) said any attempts by Republicans to limit the information that can be gathered on a company's environmental footprint and other ESG factors would be an "attack" on economic freedom.

"The uncomfortable truth is that withholding ESG information from the market means denying investors the freedom to decide where they want their dollars to go," Porter added.

The fallout

Over the last several years, much of the corporate world has been moving toward greater consideration of ESG factors in both investments and business practices. But as ESG has become a political football, insurers and other financial companies have been caught in the middle.

Some states are considering or have already passed legislation that prohibits state pension funds from doing business with asset managers that take ESG considerations into account, while other states have considered laws that would require managers of public employee pension funds to drop fossil fuel companies from their portfolios.

The impact is spreading across the globe to the Net-Zero Insurance Alliance (NZIA), which now has just over a dozen members after it has experienced numerous departures by various insurers over the past few weeks. Most declined to give a reason for their departure while vowing to continue net-zero efforts outside of the organization.

The departures came on the heels of a group of Republican attorneys general warning the insurers that their participation in NZIA appeared to violate US antitrust laws.