Wall Street is no stranger to culture wars dating back to William Jennings Bryan and the free silver movement of the 19th century. Today’s version: Conservative states’ push to get state pension funds to stop doing business with money managers who use their power to pressure companies to cut carbon emissions.
There is a list of reasons to believe that the pushback will not materially affect the movement towards investments that consider environmental, social and corporate governance goals in addition to shorter-term financial performance.
First, the backlash on ESG has so far been limited to a few states, while Republican politicians in other states are raising issues but taking limited action. Even where governments have acted, the moves appear to have had little impact on investment firms that consider ESG when picking stocks — which are almost all major money managers. And politicians are preparing for an attack on ESG based on antitrust claims — but institutional investors have framed their strategies to steer clear of legal theories pursued by Republican attorneys general, legal experts say.
“It’s not just vaporware, it’s ridiculous vaporware,” said David Nadig, exchange-traded fund expert and financial futurist at VettaFi, owner of ETFDatabase.com. Vaporware is software industry slang for products that are advertised but never hit store shelves. “They say they’re boycotting companies that are boycotting the energy industry, and then they find out BlackRock manages energy funds.”
In particular, the tussle between conservative states, with officials in Florida and Texas being the loudest, and Wall Street is about how investors should use their money to take sides in debates about energy policy and climate change. More broadly, this is yet another front in America’s culture wars, with politicians positioning themselves in opposition to what Florida Gov. Ron DeSantis calls “awakened” corporations.
“Corporate power has increasingly been used to impose an ideological agenda on the American people by perverting financial investment priorities under the euphemistic banners of environmental, social and corporate governance and diversity, inclusion and equity,” DeSantis said in a statement July 28 statement that the state will prohibit its pension funds from taking ESG criteria into account when making investments.
ESG is a branch of investment based on screening securities based on the environmental, social and corporate governance practices of their issuers. For example, companies with low carbon emissions, transparent corporate governance and good labor relations can receive high ESG scores from arbitrators such as Sustainalytics and Standard & Poor’s. Companies that make tobacco, oil, and weapons often fare poorly.
Some ESG investments are segregated from other stocks held by mutual funds and exchange-traded funds that specialize in companies that either have high ESG scores or shun certain industries, including fossil fuels. A much larger number of funds continue to hold stocks in industries that have been criticized for ESG reasons, while portfolio managers pressurize companies to improve their governance practices and reduce their pollution.
For example, members of the five-year-old Climate Action 100+ coalition control more than $68 trillion in assets, most of which are held by traditional wealth managers rather than ESG funds, said Kirsten Snow Spalding, senior director of the Ceres Investor Network and a spokesperson the Climate Action 100+.
Florida and Texas have taken different approaches, each highlighting the rise of anti-wake politicians when trying to derail ESG investing.
Florida’s Board of Administration passed policies with no specific enforcement action, though DeSantis promised to introduce follow-up legislation next year. (The DeSantis office did not respond to written inquiries from CNBC.com). The resolution requires Florida’s pension funds to consider only the likely financial performance of potential investments and place no emphasis on politics.
Texas’ SB-13 bill, passed last year, is, or appears to be, more stringent. The Texas law, modeled on the conservative American Legislative Exchange Council, requires state pension funds to divest themselves of companies that “boycott” energy companies. However, in one important exception, it precludes any obligation to divest most of the mutual funds managed by these companies.
And attorneys general in 19 states signed a letter to New York-based wealth management giant BlackRock on Aug. 4, arguing that ESG investing hurts energy companies by pushing for lower carbon emissions and questioning whether the Pressure from investors violates antitrust law.
“Although the alignment of BlackRock’s engagement priorities with environmental and social goals, such as the United Nations Sustainable Development Goals, is articulated in language about long-term value, it suggests at least a mixed motive,” the letter reads. “BlackRock’s actions appear to be deliberately constraining and damaging the competitiveness of energy markets.”
Texas law got off to a rocky start.
In its initial attempt to identify companies boycotting energy companies — a linchpin of the Texas economy — the Texas State Comptroller’s office identified only one US-based firm, New York-based BlackRock, with $8 .5 trillion US dollars under management, and nine foreign companies, including UBS and CreditSuisse.
Spokesmen for Texas Attorney General Ken Paxton and Comptroller Glenn Hegar did not respond to requests for comment. Texas Teachers spokesman Rob Maxwell said the fund will sell shares as required by law.
BlackRock has one primary goal: to be the world’s largest wealth manager by assets. But she denies boycotting energy investments at all. The $2 billion US Energy Fund, for example, has ExxonMobil, Chevron, and ConocoPhillips as its top three holdings. The largest renewable energy company in the fund, solar panel maker First Solar, accounts for less than 1 percent of its holdings. Other BlackRock funds hold energy stocks as part of broader stock indices, and still others avoid investing in fossil fuels.
BlackRock is among the top five holders of Exxon and Chevron stock. BlackRock actually owns 6.2 percent of ExxonMobil, according to the company’s annual proxy disclosure in April.
BlackRock has felt pressure to make this case louder since the political backlash began, and its recent comments on energy investing and its softer stance at shareholder meetings have drawn resistance from climate investors.
BlackRock’s approach to ESG involves its investment stewardship teams first working directly with companies on issues where they support change. For example, the company voted against re-electing three directors at Exxon in 2021, which climate investors had hoped would mark a game changer for the company, using its shareholder power to be more aggressive in proxy contests. But the company says it actually gave more support to incumbent management teams this year and voted for fewer shareholder resolutions than in 2021 because companies are becoming more aggressive on climate action.
That’s how most ESG investing works, says Spalding.
The CA 100+ approach is based on shareholder lobbying with company leaders for lower emissions, earlier and more detailed disclosure of emission reduction plans and improved corporate governance, she said. Certain CA100+ members take the lead in tracking each of the 166 high-carbon companies the network follows, report their findings to the group through semi-annual surveys, and are required to remain shareholders to be the group’s emissary for that company, she said.
“It’s as far from a boycott as you can get,” said Spalding, who is both a former law professor and episcopal priest. “The clear line in our approach is that each institution makes its own decisions.”
The broader ESG community would have little trouble with Florida’s approach because ESG is based on the idea that poorly managed climate risk will ultimately hurt companies’ bottom line, Spalding said. “These are large institutions with a very clear sense of their fiduciary duty,” she said. They are clearly working on what they see as systemic financial risk.”
Legal experts say each institution’s independence in implementing climate goals is likely to shield them from the antitrust claims that attorneys general are investigating.
Antitrust laws, which ban trade-restricting combinations because they often raise prices and hamper competition, can prohibit boycotts, particularly when they are instituted to get a company to change its prices, said Hill Wellford, a partner at Vinson & Elkins, who presented a paper on ESG and antitrust law at the American Bar Association Spring Conference.
But a network like CA100+, which shares information without prescribing what each member should do with it, is unlikely to qualify unless the state AGs find facts about coordinated actions that have not yet been disclosed, he said. That’s unlikely as big companies with on-staff lawyers understand how to stay out of trouble because the law is well regulated, he said.
“If it’s not a concerted action, it’s not a boycott,” said Michael Carrier, an antitrust expert at Rutgers Law School in Camden, NJ
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