US Republicans hoping to quash environmental, social and governance investing in state capitols are running into opposition from influential local banks, jeopardising their efforts to blacklist financial institutions accused of disadvantaging oil and gas companies.
At least 49 anti-ESG bills have been introduced across the country this year, according to a February 8 report from law firm Ropes & Gray, while about 22 were introduced in 2022.
On Monday, Florida Republican governor Ron DeSantis announced legislative initiatives targeting financial companies that use ESG in investing. The bills would ban banks and other financial groups from “discriminating against” energy companies, gun sellers and other businesses. Asset managers would also be banned from considering ESG in investment decisions.
“We are going to make sure that ESG is not infecting other decisions at both the state and local governments,” DeSantis said.
However, such Republican attacks are starting to face blowback at the state level. The Indiana Bankers Association, which represents 116 banks, is lobbying against legislation that would require the state to divest and cancel contracts with financial groups that consider “social, political, or ideological” factors.
“A lot of my members have ESG statements,” Dax Denton, the organisation’s chief policy officer, said at a hearing last month, adding that these “could prohibit an institution from being a custodian of the state’s finances as a result of this legislation”.
Though small banks do not have the same name recognition as their Wall Street peers, community lenders have significant sway over lawmakers. Operating in rural counties often overlooked by big financial institutions, community banks tend to have better political relationships and have historically enjoyed collective lobbying muscle at the state and federal level.
In Nebraska, the state’s bankers association has opposed legislation that would ban lenders from considering social, political or ideological interests when making certain investment decisions.
In North Dakota, the head of the state’s banking association testified against legislation that would have required its treasurer to list financial companies accused of boycotting energy suppliers. Earlier this month, the boycott bill was voted down in the state house.
ESG concerns typically steer investors away from oil and gas companies, which have been the best-performing businesses in the S&P 500 over the past 12 months. As a result, two-thirds of active ESG funds underperformed the market, according to a February 12 report from Jefferies. US ESG funds saw outflows of $6.1bn in the last three months of 2022, and political “backlash was a key driver of the US ESG outflows” during the quarter, the firm said.
Republicans have largely aimed their ESG vitriol at BlackRock, which has focused more on climate change risks than other big asset managers. Republican state treasurers have pulled about $4bn from the asset manager over ESG concerns, chief executive Larry Fink said earlier this year.
Some states have also expressed concerns about moves to limit pension funds’ relationships with investment managers due to ESG. In Kentucky, the state’s county employees pension system said it could not comply with a proposal to cut ties with 11 financial companies due to allegations that they boycott energy companies.
State pension funds use “pretty exhaustive” processes to pick investment managers and “are worried about if they have to divest from managers that they are using”, said Joshua Lichtenstein, a partner at Ropes & Gray.
Additional reporting by Brooke Masters