by Conservative Republicans who want to block socially and environmentally conscious investment are now under pressure to water down their proposals after a backlash from powerful business groups and fears that state pension systems could see huge losses.
In both Kansas and Indiana, where the GOP has legislative supermajorities, bankers associations and state chambers of commerce have criticized stronger versions of the anti-ESG legislation currently being considered as anti-free market.
In Kansas, their opposition prompted the chairman of a Senate committee to reject the toughest version of her bill — applying anti-ESG rules to companies that handle private investments — before hearings began this week. A Kansas committee was set to vote on Thursday but could delay action on a softer version of an anti-ESG bill after the head of the state’s Retirement System for Teachers and Public Employees warned it could see losses of 3.6 billions of dollars over 10 years if the bill is passed.
And last month, legislative researchers in Indiana reported that its pension system expected the first version of a House bill to cost the system $6.7 billion over 10 years, prompting lawmakers to rewrite it before the House passes it.
ESG stands for environmental, social and governance, and the increased use of these factors in investing in recent years has inspired GOP efforts to prevent it. Now, those efforts are troubling groups that have long allied with Republicans to support fewer government regulations.
“That’s the underlying political nature of this,” said Bryan McGannon, deputy managing director and managing director for US SIF: The Forum for Responsible and Sustainable Investment. “They really don’t think about the implications of the kind of real-world effects of what this means in the financial system.”
About an eighth of US assets under professional management, or $8.4 trillion, are managed according to ESG principles, according to a December report by US SIF, which promotes sustainable investing.
At least seven states, including Oklahoma, Texas and West Virginia, have enacted anti-ESG laws in the past two years. GOP governors. Ron DeSantis of Florida and Greg Gianforte of Montana have also moved to ensure that their states’ funds are not invested using ESG principles.
Critics of ESG argue that using investments to wean the US off fossil fuels, address gun violence or protect abortion rights sacrifices returns for investors and undermines public pension finances.
“An agent who represents or invests on behalf of the principal has a fiduciary duty to put the principal’s interest above the agent’s interest,” Kansas Attorney General Chris Kobach, a conservative Republican, told a state Senate committee this week . “That principle is such a core of American law.”
Anti-ESG efforts are also drawing support from companies and industries that feel under attack, such as oil and gas producers. During an Indiana House committee hearing last month, lawmakers heard a series of complaints from businesses, including those in coal mining and firearms manufacturing, about hardships they blame on corporate ESG policies.
“This is, again, a social agenda that’s chasing something they shouldn’t be chasing,” said Kansas Senate committee chairman Mike Thompson, a Kansas City Republican who calls ESG investing “potentially dangerous.”
Public pension funds are caught up in the debate as large institutional investors: Kansas’ system has $25 billion in assets, and Indiana’s has $45 billion. NASRA, the association representing US public pension fund managers, opposes any move — including the debate on both sides of ESG — to make the safety of pension fund assets a “primary objective.”
In Kansas, Thompson tried Wednesday to organize behind-the-scenes talks to address the state pension system’s concerns.
Its executive director, Alan Conroy, testified that the current proposals by Kansas lawmakers are so broad that the state pension system could not hire or retain an investment manager who did “anything in this ESG world.” The pension system would have to fire them all, hire new people and probably settle for lower investment returns, he said.
Similar concerns played out in Indiana, but the pension system there balked at the estimated losses after House members revised their bill.
Proponents say ESG is not about boycotting certain industries or companies, but doing a better job of assessing future risks, such as the costs of major accidents or pollution or the reduction of local water supplies. They argue that considering such factors is part of an investment manager’s obligation to achieve the best possible returns.
“The free market is trying to create a better risk assessment framework, more comprehensive,” said Zack Pistora, a lobbyist for the Sierra Club in Kansas.
In Kansas, the bankers and credit unions association and the state Chamber of Commerce have gone from opposing the harshest version of the anti-ESG legislation to a neutral stance on all or most of its milder cousin. In Indiana, the state legislature approved the more limited version.
Eric Stafford, a veteran spokesman for the Kansas Chamber of Commerce, said free markets will make corrections if ESG investing offers lower returns. And Alex Orel, a lobbyist for the Kansas Bankers Association, worried about a political “pendulum.”
He said: “You go too far to the right, you turn around and it hits you right in the face.”
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Davis reported from Indianapolis.
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