| Texas state Sen. Bryan Hughes, seen here at a committee hearing in 2021, quizzed asset managers BlackRock and State Street in December 2022 about their companies' policies on environmentally conscious investing. Source: Tamir Kalifa/Getty Images News via Getty Images |
This article is the first of a two-part series on efforts to counteract ESG's increasing role in investment policies.
In mid-December 2022, Texas lawmakers summoned executives from BlackRock Inc. and State Street Corp. to a remote courthouse 151 miles east of Dallas to answer questions about their firms' environmental, social and governance investing policies.
The nearly six-hour hearing was part of a tightly coordinated campaign, led by Texas and at least 23 other Republican-led states, conservative think tanks and right-leaning groups, against ESG investment standards. Fossil fuel-friendly interests with a history of influencing U.S. energy and social policies are driving the effort, documents obtained by S&P Global Commodity Insights showed.
Lawmakers with the Texas Senate Committee on State Affairs demanded to know if BlackRock and State Street, two leading asset management firms, are pushing public pension funds to divest from the fossil fuel industries that are a key component of Texas' economy.
"When there's no funding for energy projects, energy projects don't get done," committee Chair Bryan Hughes told the room. "Energy costs go up, jobs go away."
When contacted for comment, BlackRock and State Street each referred Commodity Insights to the transcript from the Texas hearing.
"We have one bias, and that's to get the best risk-adjusted returns for our clients," Dalia Blass, BlackRock's head of external affairs, told the Texas committee when asked if the firm prefers to invest in renewable energy sources.
Conservatives have paired economic concerns, such as the ones Hughes voiced at the hearing, with Republican grievances over Biden administration climate and social policies, fueling the anti-ESG investment campaign over the past year.
"They built a very strong, state-based network with direct access to legislators," Jesse Coleman, a senior researcher with the watchdog group Documented, said in an interview. "It's really a concerted effort."
Documented filed record requests with state treasury offices, yielding email correspondence and letters showing the extent of the network and groups involved. Dozens of records shared by Coleman's group, which is funded by nonprofit foundations focused on climate change, show how the movement to eliminate ESG investing from investment companies took off.
ESG backlash part of broad conservative agenda
A Kansas-based nonprofit called the State Financial Officers Foundation has played a leading role in the state campaign against ESG investment with the help of strategic public relations firm CRC Advisors, retained in spring 2022. By the end of the year, half a dozen organizations and most U.S. states with Republican leadership were on board, records show.
The chairman of CRC Advisors is Leonard Leo, the co-chair of the conservative legal nonprofit Federalist Society and an influential Republican activist and fundraiser. Leo focuses on a nonprofit trust he founded in 2020, after receiving a $1.6 billion donation, to influence U.S. Supreme Court nominations and other conservative priorities, The New York Times reported in August 2022.
CRC Advisors has been holding weekly Zoom calls with state treasurers to keep them abreast of new ESG developments, according to email correspondence that Documented obtained.
Groups such as the American Petroleum Institute, which lobbies for the oil and gas industry, and the American Legislative Exchange Council sometimes participated in such calls.
"Treasurers, auditors, CFOs, commissioners and comptrollers, please do everything you can to be on this call," State Financial Officers Foundation CEO Derek Kreifels said in a May 2022 email about an API briefing on the SEC's climate risk disclosure rule.
The API has also been coordinating directly with states. In March 2022, for example, the head of API's Ohio division alerted the state's attorney's office to a Wall Street Journal opinion piece arguing that ESG investing may violate antitrust laws.
The policy lead for the State Financial Officers Foundation is Jonathan Williams, also the chief economist and executive vice president of the American Legislative Exchange Council, or ALEC. The ALEC has long fought climate and environmental regulations and faced high-profile member departures as a result. The group is best known for its prolific production of model state legislation.
State Financial Officers Foundation, CRC Advisors and the API did not respond to Commodity Insights' requests for comment.
| A 2021 winter storm led to widespread blackouts and fuel shortages in Texas. Extreme weather poses a growing risk to investors, according to financial firms that use ESG to screen for climate change and other risks. Source: Ron Jenkins/Getty Images News via Getty Images |
States, interest groups gearing up for 2023 action
Efforts to push ESG considerations out of investment decisions have been building for over a year.
Andy Puzder, a former fast-food executive and Trump labor secretary nominee, said he was asked by a Florida think tank in fall 2021 to draft state legislation barring asset managers with ESG policies from managing state pension funds.
Large asset managers with shareholder voting power use ESG policies as a pretense, the argument went, to push a left-wing political agenda that violates the firms' fiduciary duty to act in the best financial interest of state pensioners. In oil-rich Texas, for example, a shift away from fossil fuels goes against the economic interest and values of people in the state, the reasoning concluded.
Puzder had soon drafted the bill language, and the idea took off.
"People at ALEC and Heritage [Foundation] cleaned it up and based their model legislation on that," Puzder said in an interview. "The idea was that we could take those fiduciary duty provisions, and states could enact them."
A few months later, Puzder's bill had become an official ALEC model policy known as the State Government Employee Retirement Protection Act.
Reached in a western state where he was meeting with legislators in early January, Williams said his group just wants to protect state employees' retirement savings.
"At the state level, the rules are really all over the map," Williams told Commodity Insights. "The idea of a model policy is to just hopefully raise awareness and educate around this issue. Politically based investing needs to go, and investing needs to be done with the sole beneficiary of the recipients in mind."
West Virginia Treasurer Riley Moore described the scope of the campaign in broader terms. ESG-based investing "is a combination of regulatory, anti-competitive cultural and social maneuvers aimed at making the free market unfree," Moore said in a speech at the National Conservatism Conference held in Miami in September 2022. "This attack can end if we win the fight for American energy."
'Markets stop functioning'
At the same time, the anti-ESG investment campaign moved beyond asset managers and banks.
In April 2022 — soon after the ALEC model policy was published — Utah Treasurer Marlo Oaks sent a letter to S&P Global over its ESG credit indicator report cards for states. The API had assisted the treasurer with media talking points the previous day, email correspondence shows. The parent of Commodity Insights, S&P Global is a leading provider of ESG data, ratings and analytics.
Oaks alleged the company may have engaged in a conflict of interest when publishing such assessments while participating in the Net Zero Financial Service Providers Alliance. The alliance supports the global goal to reach net-zero greenhouse gas emissions by 2050.
"When politics force an agenda and gets enough participants to behave one way, markets stop functioning properly," Oaks said in a statement provided by his office.
An S&P Global Ratings spokesperson said the company's ESG credit indicators provide investors with additional transparency. The indicators "reflect our opinion of the influence that [ESG] factors have on our credit rating analysis," the spokesperson said in a statement. "They are not sustainability ratings or a stand-alone assessment of an entity's ESG performance."
Not long after sending the letter, the Utah treasurer said in an appearance on Tucker Carlson's Fox News show that ESG policy was also responsible for high gasoline prices and economywide inflation.
"It's a supply issue," Oaks said. "The ESG people have decided that they do not want to participate in the fossil fuel industry so they are cutting off capital."
Oil and gas companies actually reported record profits in 2022 and are flush with cash amid the dramatic rebound in demand as pandemic restrictions were lifted and the war in Ukraine drove up market prices. Kevin Roberts, president of the Heritage Foundation and a critic of the "anti-energy elite," nonetheless congratulated the treasurer on his Tucker Carlson interview in an email two days after the show aired.
"We appreciate how on target you are with ESG," Roberts wrote. "Keep up the good fight!"
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