January 24, 2023

Republican efforts to limit ESG investing are anti-capitalist

There is a cohort of elected officials in the United States presently engaged in an anti-capitalist crusade against free-market principles. No, they are not socialists. They are congressional Republicans, and they are attempting to prevent financial institutions from allocating capital in accordance with investor preferences and risk management principles. This attempted crackdown is purely ideological in nature — it is an exercise in political pressure to force a gross government overreach into U.S. capital markets.

This campaign, which should offend anyone with even a modicum of pro-market sensibilities, is being championed from within the Republican Party. Republican state lawmakers and members of Congress are attempting to stifle the growth of sustainable investing and to punish corporate efforts at climate-related financial risk management.

The underlying problem is that the fossil fuel industry is running up against a “risk wall,” where long-established economic risks associated with climate change are now sufficiently clear and present to trigger ordinary risk-reporting requirements in financial markets. Rather than reduce their emissions, or face up to the risks that they cause, the fossil fuel industry is trying to break and remake traditional risk reporting to selectively remove reporting of climate-related risks.

If it seems that elected Republicans have very suddenly awakened to the momentum toward climate risk reporting and the popularity of so-called environmental, social, and governance (ESG) investing, and dramatically stepped up their counteroffensive accordingly, that is no coincidence. This is a closely coordinated political effort driven by a network of dark money organizations fronting for climate denial groups and fossil fuel interests.

The recent election showed the extent of the Republican Party’s dependence on “outside spending.” This is usually anonymous dark money, and it is often traceable back to the fossil fuel industry. Those millions in political dark money likely came with strings attached, and those strings are likely pulling this political effort.

As of this year, there are $8.4 trillion in U.S. assets under management that employ sustainable investing strategies. The boom in sustainable and responsible investing has occurred for a very simple reason: there is enormous market demand for it. Warnings abound of significant economic risks that are plainly foreseeable if we don’t transition to a low-carbon economy.

Investors see that danger ahead. Asset owners, accordingly, are clamoring for responsible investment options. They may have determined that sustainable investments better suit their risk tolerance and objectives over longer time horizons, as is the case for many pension funds whose beneficiaries depend on long-term, prudent stewardship of their retirement savings.

Or, they may be responding to clients who want investment options that align with their personal values. Either way, asset managers have simply kept pace with this demand. To refuse to do so would be to lose share in this rapidly growing, competitive market.

Elected officials should ensure that financial regulatory agencies properly account for risks in their financial stability and supervisory work. Climate change poses unambiguous risks to the financial system, and regulated financial institutions do not have the luxury of picking which risks to manage and which risks to ignore.

But Republicans are engaged in an entirely different pursuit. They are attempting to bully financial institutions and regulators into ignoring market demand and market risk. Imagine elected officials telling investment firms they cannot offer large-cap or small-cap funds, or emerging market funds, or value funds — or, for that matter, sector funds with exposure to energy companies.

That would be considered preposterous. It is similarly bizarre to tell asset managers they are not allowed to reflect the preferences of their investors in their investment stewardship and proxy voting, or to tell regulators that they are not allowed to consider a major source of economic and financial risk.

This isn’t how the free market works. This is picking winners and losers, in this case putting a thumb on the scale in favor of the fossil fuel industry and completely disregarding the overwhelming risks that climate change poses to our economy and financial system.

There is no reason to think Republicans will stop with ESG; next, they could very well be telling investors not to put their money in tech companies or companies with unions. It is a stunning exercise in bald-faced hypocrisy from the party that so often claims to champion free-market values. The intent of their effort is very straightforward: to create a chilling effect and force financial firms to disregard the market’s preferences and regulators to disregard actual risk. Wall Street — and its regulators — must not be intimidated.

By: Sens. Sheldon Whitehouse, D-R.I., Brian Schatz, D-Hawaii and Martin Heinrich, D-N.M.