More Republican-led states are refusing to do business with financial institutions that embrace a “woke” agenda on issues such as climate change, guns and other social issues.
It is part of a growing pushback among conservative elected officials against banks and investment managers that base business decisions and investment choices not on maximizing profits but on progressive views about environmental, social and governance issues or what’s known as ESG principles.
Notably, the ESG movement has major Wall Street firms putting the fossil fuel industry on the chopping block because of climate change, a move that could result in costly financial implications for energy companies, banks and taxpayers alike.
West Virginia was the first state to give some of the world’s biggest banks the boot, barring five major Wall Street firms — Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo and BlackRock, one of the globe’s largest asset managers — from doing business with the state. Citing the firms’ anti-coal policies or plans to divest from fossil fuels, the state will pull out tens of millions of dollars.
West Virginia is the second largest coal producer in the country, with coal and other fossil fuels accounting for the third-largest annual revenue source for the state, more than $750 million annually.
“You have your right to be able to boycott the fossil fuel industry, but we’re not going to do business with you. We’re not going to pay for our own destruction,” West Virginia Treasurer Riley Moore said in a recent interview. “They’ve weaponized tax dollars against the very people and industries that have generated those dollars.”
Corporate boards that follow ESG principles would note that coal is also the dirtiest fossil fuel and a significant contributor to climate-changing greenhouse gas emissions.
ESG stretches far beyond the environment to include fraught social issues like racial justice and the Black Lives Matter movement, gun control and LGBTQ issues. It also involves corporate governance issues including transparency and diversity measures such as imposing gender quotas for the board of directors.
The problem with ESG policies, said NYU Professor of Finance Aswath Damodaran, is that it’s “like nailing Jell-O to a wall” because they are based largely on what is perceived as good versus bad rather than set parameters.
“ESG advocates who complain about red states pushing back on ESG policies are like pyromaniacs complaining about how hot it’s getting. You brought the fire into the game; you have to live with it,” he said. “The only people that win are ESG consultants, who make a hefty amount telling companies exactly what they should be doing.”
Banks hit by states’ new anti-ESG policies objected. JPMorgan said it was disappointed with West Virginia’s move and called it an “anti-free market” policy. The firm insisted that its billions of dollars in past and current fossil fuel investments show that they don’t discriminate against those energy companies, even if they are scaling back such investments.
West Virginia paved the way for Mr. Moore’s action by enacting a law permitting him to sever government ties with banks considered to be “boycotting” energy companies. Mr. Moore, a Republican, said he is coordinating with other state officials across the country to confront ESG policies.
Anti-ESG legislation similar to West Virginia’s is in the works in at least 16 other states. Governors in Kentucky, Tennessee, Oklahoma and Texas this year signed anti-ESG bills into law. Florida Gov. Ron DeSantis, a Republican who is eyeing a 2024 run for the White House, recently said he wants to prohibit the consideration of ESG factors for his state’s pension fund.
The issue also is gaining traction with Republicans on the national stage.
Former Vice President Mike Pence, another possible 2024 presidential hopeful, has advocated for reining in ESG.
Republicans on Capitol Hill hope to address the issue if they regain control of Congress in the November midterms.
Democrats counter that Republicans are the radicals, not the socially-conscious corporate board members.
“Republicans demonstrate their extremism every day. They’ve done it on abortion, on gun safety and on climate,” said Sen. Elizabeth Warren, Massachusetts Democrat. “They’re way out of step with the American people and with the demands of the 21st century.”
There’s also some pushback to the anti-ESG movement from GOP lawmakers who warn that dropping big banks could be costly and lead to unintended consequences.
Private companies’ investment decisions aren’t the federal government’s business, said Sen. Joni Ernst of Iowa, a member of the chamber’s GOP leadership. She said it should be left up to individual states.
“I just don’t think we should be telling those financial institutions — that we’re not involved with federally, other than certain regulations — who they should be approving finances for or not,” Ms. Ernst said in an interview. “We see this happen with different ideologies, whether it’s on the environment, whether it is surrounding guns or other social issues. I just don’t think we should be going down that avenue.”
Others have warned that dropping ESG firms could lead to higher borrowing rates for states and extra costs for taxpayers.
Texas will pay up to an extra $532 million in interest on $32 billion worth of loans within eight months because it stopped doing business with banks that have anti-fossil fuel policies or discriminate against gun makers, according to a recent study by the University of Pennsylvania’s Wharton business school and the Federal Reserve Board of Governors.
ESG advocates said that a changing climate could pose even costlier risks as the intensity and frequency of natural disasters increase.
“Whether you’re Republican or Democrat, if your assets are underwater, or if your investments that have a horizon of 2030 or 2050 don’t pay off, you’re going to lose money,” said Witold Henisz, vice dean of Wharton’s ESG Initiative. “Who would want to do business with an insurance company that doesn’t charge more to people that have more accidents?”
Still, Mr. Moore predicted a wave of injunctions against banks from red states like his West Virginia unless companies change their tune.
“You’re going to see a lot more of this going on,” he said. “These financial institutions need to make the determination: is this the best course of action for their investors and shareholders to continue on?”