Attacks on a socially responsible investing strategy called ESG (that considers environmental, social, and governance criteria) are being used—like accusations of widespread voter fraud or teaching critical race theory—as a wedge to divide and mislead Americans and halt social and environmental progress.

Lawmakers in 10 states, including Florida and Texas, have recently passed policies that prohibit considering ESG when making investing decisions with state money, and seven more states have introduced similar bans or have pending bans, according to tracking by Morgan Lewis law firm. The laws prohibit state investors or the banks they use from considering ESG criteria, even when it is the smartest financial decision. The supposed point of these rules is to protect industries that are important to state economies, but so far that has only included fossil fuels and firearms—and the way the rules are written, even financial experts and banks don’t understand them.

“Republican lawmakers are using this attack on what they call ‘woke capitalism’ as part of their anti-climate, pro-gun strategy,” says Fran Teplitz, Green America’s executive co-director for business, investing and policy. “With Republicans in control of the House again after the midterms, they will likely use committee hearings to further attack ESG.”

Anti-ESG policies are already having a chilling effect on companies, by walking back climate commitments in order to keep doing business with these states.

“Whether it’s a moral argument, financial argument, or risk-hedge argument, it’s a very dangerous position, to say ‘we’re going to double down on fossil fuels,’” says Stephanie Cohn Rupp, CEO of Veris Wealth Partners.

What is ESG?

ESG means taking into consideration environmental, social, and governance decisions of a company, alongside traditional financial analysis, when deciding whether to invest in it.

ESG commitments are booming from banks and big businesses, which are using ESG data like climate risk (environmental), labor issues (social), and board effectiveness (governance) to see both how resilient and profitable their portfolios will be in the future.

ESG is already deeply embedded in investing practices, with global sustainable investing surpassing $35 trillion by 2020 and projected to reach $50 trillion by 2025, according to Bloomberg Intelligence.

Attacks on ESG & Their Impacts

Two 2021 Texas Senate bills prohibit local jurisdictions from working with banks that had adopted ESG policies “against” the oil and gas or firearms industries. After implementing the policies, Texas jurisdictions stopped working with JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Fidelity for their municipal bonds ostensibly because of their ESG commitments.

Making that switch meant having to renegotiate terms of many bonds with different banks, which cost taxpayers up to an estimated $532 million in the first eight months of the policy, according to a 2022 study.

Ironically, those megabanks are not boycotting the fossil fuel industry—in fact, JPMorgan Chase, Citigroup, and Bank of America are in the global top four banks funding fossil fuels, according to the Rainforest Action Network’s Banking on Climate Chaos Report. Those three banks have provided $899 billion combined in fossil fuel lending since 2016.

It’s a very dangerous position, to say ‘We’re going to double down on fossil fuels.’

— Stephanie Cohn Rupp, Veris Wealth Partners

Larry Fink, the CEO of BlackRock, the world’s largest investing firm, had issued a letter saying the company would “confront the global threat of climate change more forcefully.” But another executive at the company also issued a letter saying it would “continue to invest in and support fossil fuel companies, including Texas fossil fuel companies.” Companies going back on their climate statements is the exact chilling effect that politicians who introduce these laws are aiming for.

Florida Governor Ron DeSantis passed a resolution that prohibits the managers for the state’s $186 billion pension fund from considering ESG factors and requires managers to “only consider maximizing returns.” This fails to account for the ability of ESG criteria to contribute to maximizing returns, proving these attacks are being used as a culture war strategy rather than as investment strategy.

Why ESG Will Continue to Grow

Dan Garrett, the assistant professor of finance at the University of Pennsylvania who co-authored the study about Texas bonds, explained that most investment companies and investors are trying to get oil and gas off their balance sheets in the next 20 years, as the industry is declining and most agree it will continue to do so. Though oil and gas companies are currently seeing record profits partially because of the war in Ukraine, as renewable energy increases, the sector’s revenues will decline, and face stranded assets—creating long-term risk. But in Texas, Garrett says, the industry directly generates 10.6% of the state GDP.

“So, [policymakers’] incentive is ‘we would like to stop this capital from flowing out of our state,’” says Garrett. “Did this sort of policy slow that capital moving out of oil and gas? Maybe not.”

DeSantis’ position is that, “we are protecting Floridians from woke capital.” Most finance experts disagree with DeSantis and would say that considering ESG and maximizing returns are not in conflict.

In fact, a New York University report examining over 1,000 studies between 2015-2020 showed that sustainability initiatives at corporations drive better financial performance due to improved risk management and innovation.

What Green America Is Doing and What You Can Do

For decades, Green America has been working to help people align their investments with their values. Green America is now working to maintain momentum for ESG and combat misinformation from the radical right among investors, institutional investors, financial advisors, and funds. An immediate focus is on public messaging especially through social media—check out and share our posts at facebook.com/green-america. There are also steps investors and concerned citizens can take to protect ESG investing. Folks who have their pensions in state retirement programs can be especially effective advocates.

“Pensioners are the ideal spokespeople, as investors, because they worked hard and want their money to be there to sustain them in their retirement,” says Rachel Kahn-Troster, executive vice president at ICCR {GBN}. “They want the people managing their money to ensure the money is there and be assured that our planet and society are there in the future.”

Kahn-Troster adds that concerned citizens should call their local and state representatives, no matter what color their state swings. Investors can speak with their investment managers to express that using ESG as a lens to navigate investments and mitigate risks is important to them. Investing that considers ESG criteria alongside financial analysis is a prudent investment approach to build wealth. ESG investing is financially competitive, helps improve companies, and generates better outcomes for workers, communities, and the environment.

While the attacks on ESG are dangerous, fortunately there is widespread recognition among investment professionals and many regulators that ESG is legitimate and generates positive outcomes for all stakeholders. By doing a better job of identifying investment risk and opportunity, sustainable investing is expected to continue to grow.

Former vice president Al Gore and David Blood, co-founder of Generation Investment Management, co-authored a Wall Street Journal op-ed in November, strongly defending ESG: “The investment community is adapting for the next chapter of capitalism, in which sustainable investing is mainstream. This is the only way the planet, its people, and their investments can thrive.”