While those European investors still in doubt about the importance of ESG are becoming increasingly bogged down in a rearguard action, U.S. states are increasingly passing anti-ESG laws. “If this becomes federal policy, I would underweight the U.S. in the portfolio,” said Gaya Herrington, a sustainability researcher and advisor to the Club of Rome.
According to the Republican Party, the main goal of asset managers is no longer returns, but the pursuit of everything from climate change to workplace diversity. They say they’re done with it.
The latest feat in the fight against ESG investing is the law signed by Florida governor – and possible presidential candidate – Ron DeSantis prohibiting public or state-controlled funds in Florida from investing based on ESG factors. Similar laws have previously been passed in the states of Indiana, Kansas and Texas, among others.
Just before signing the law earlier this month, DeSantis said, “These funds should act as fiduciaries. They should not engage in ideological pleasure rides.” In a column published on Tuesday in the Wall Street Journal, Marlo Oaks and Todd Russ, the state treasurers of Utah and Oklahoma, talk about the «worst breach of the duty of care in American history.”
Financial institutions that exist to earn returns on investments are instead abusing pension funds, public pensions and other investments to “openly pursue ideological goals,” Oaks and Russ said.
Opponents of the law, on the other hand, see anti-ESG legislation as a “political joyride”. Politicians like DeSantis, they say, have absolutely no interest in the facts, but are obsessed with their political narrative.
Americans are not anti-ESG
“Banning ESG investments is the exact opposite of what fiduciary duties mandate, maximising investment income,” said Herrington (photo), in conversation with Investment Officer. ESG risks, she said, are still not adequately priced in. Failure to consider ESG when making investment decisions can have huge financial consequences, according to Herrington.
The Washington DC-based Dutch citizen began her career as an economic policy adviser at a major Dutch bank, De Nederlandsche Bank, and said she understands how incomprehensible some U.S. political choices can be to Europeans.
“However, it is important to remember that most Americans are not necessarily anti-ESG,” Herrington said. “Most Americans do want to do something about climate change, but political polarisation is pushing that down.” According to her, the new laws are little more than a political statement designed to persuade voters to vote Republican. Scientific research also points in that direction.
A March 2023 study by Shivaram Rajgopal, professor of accounting at Columbia University, shows that the similar Texas ban on the use of ESG investments had absolutely no effect on the energy exposure and risk-return characteristics of state pension funds.
“The legislation probably serves no purpose other than political posturing,” Rajgopal said.
Win for the Republicans
Should the Republicans win the presidential election next year, and negative attitudes toward ESG seep into federal legislation, investors would have a problem, said Herrington, who is considering moving back to Europe with her family if the U.S. turns red again.
According to Herrington, the 2024 presidential election is a “now-or-never moment” in the fight for a more sustainable world. If we don’t want to move past the tipping point where the collapse of our ecosystem becomes insoluble, a Republican victory would be very unfavourable, Herrington said, warning investors against considering U.S. stocks.
“I wouldn’t go so far as to say investors should pull their money out of the U.S., but I would advise against betting primarily on U.S. assets if the Republicans return to power,” Herrington said.
“Right now the U.S. is still a world power and will remain so, but that power is clearly on the wane. If the Republicans win I fear that that power will decline more rapidly. It is difficult to present a strong economic front when the majority of the population, such as youth, women, and homosexuals, are oppressed during unprecedented environmental pollution and increasing resource scarcity.”