State Lawmakers Push Back on ESG Metrics

Republican lawmakers in some states are speaking out against banks using ESG metrics to evaluate investments

Lawmakers from several states are lambasting American financial institutions for their increased use of environmental, social, and governance (ESG) metrics to evaluate investment risks and credit risk factors. Some of the critics have gained traction in Congress.

Utah's governor, treasurer, and other constitutional office holders sent a letter addressed to S&P Global Ratings president Martina L. Chueng stating their opposition to any ESG ratings, credit indicators, or other ESG scoring system that distinguishes ESG elements apart from, in addition to, or aside from conventional credit ratings. The Utah state treasurer, Marlo Oaks, condemned S&P Global Inc.'s credit rating division for plans to include a score on certain ESG indicators, such as climate risk and demographic trends, in their analysis of states.

The inclusion of environmental, social, and governance criteria in the credit rating has sparked a wave of criticism from the state's GOP lawmakers, who argue that including those criteria goes against conventional financial standards. 

“To call them ‘credit indicators’ attempts to legitimize a dubious and unproven exercise in developing a political rating system that is based on indeterminate factors,” the letter said. “Traditional public finance entity credit ratings already incorporate financially material factors, including ESG factors.” 

Utah Gov. Spencer J. Cox, along with other state authorities and Utah's entire congressional delegation, signed the letter alongside Oaks. The group included Republican Sens. Mitt Romney and Mike Lee and Reps. John Curtis, Blake D. Moore, Burgess Owens, and Chris Stewart. 

Senator Chris Stewart said he and his colleagues have been encouraging other Republican representatives to have similar talks with their state treasurers and financial regulators about the use of ESG metrics. 

Lawmakers claim that if the GOP regains control of the House, it will seek to utilize appropriation riders to repeal future ESG rules. The rider, which has been in place since at least 2005, prohibits the Securities and Exchange Commission (SEC) from proposing new rules regarding corporate political campaign contributions. 

The letter emphasizes the efforts of GOP lawmakers who are resisting the financial sector's embrace of environmental, social, and governance metrics in credit analysis and investment decisions. In particular, fossil-fuel-producing states have implemented policies to prevent officials from dealing with firms that are moving away from carbon or considering climate change in their own investments. 

Texas Comptroller Glenn Hegar issued letters to almost 20 banks and financial services firms asking whether their money restricts or prevents investors from funding fossil fuel enterprises. The letters were sent in response to an effort by environmental organizations to boycott investment vehicles that had divested from oil, gas, and coal businesses. 

Hegar’s recipients included the world’s largest asset-management company BlackRock, which has been identified as harboring deliberate fossil fuel divestment policies. This has consequences for Texas's pension funds. As of earlier this year, the state's biggest pension fund, the Teacher Retirement System, had almost $7.5 billion invested in BlackRock — whether it be through stock or funds managed by BlackRock. 

Existing law may support the pushback against ESG 

The State Government Employee Retirement Protection Act is a model law from the American Legislative Exchange Council (ALEC) that "protects pensioners from politically motivated investment strategies." 

According to the conservative organization, which consists of nearly a quarter of the country's state legislators and serves over 60 million Americans, ESG-oriented methods in investments reduce investment returns over time, hurting pensioners and taxpayers. 

Under the policy framework, state and local pension fund plan sponsors must assess investments solely on pecuniary -- financial -- factors, which are defined as a factor with a substantial influence on financial risk or returns on investments. ESG factors are considered financial factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. 

Republicans' criticisms and actions to combat the movement, according to investors and ESG supporters, are misguided, especially when it comes to climate risk. 

Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said that his organization rejects the argument that ESG is not materially impactful. “There is lots of data that shows” ESG is material, he said in an interview. “There is also data that shows that companies that address these issues over the long term do better financially because they think about these constituencies.” 

While not all ESG concerns are of the same importance, investors' sentiments suggest that material and transitory hazards from climate change and other issues will have an influence on their portfolios' returns. Excluded or neglected ESG factors may jeopardize American pension funds and portfolio investments. 

Republicans may push for more oversight of what the SEC does on ESG standards and submit additional bills that question the use of non-traditional financial metrics. If a majority of the House and Senate members vote for an amendment that includes these measures, it would be similar to what Republicans did in prior Congresses when they held both chambers. They would have little influence on investors' general feeling that ESG criteria are on an equal footing with other financial drivers.