How Environmentally Conscious Investing Became a Target of Conservatives

It’s been a widely accepted trend in financial circles for nearly two decades. But suddenly, Republicans have launched an assault on a philosophy that says that companies should be concerned with not just profits but also how their businesses affect the environment and society.

More than $18 trillion is held in investment funds that follow the investing principle known as E.S.G. — shorthand for prioritizing environmental, social and governance factors — a strategy that has been adopted by major corporations around the globe.

Now, Republicans around the country say Wall Street has taken a sharp left turn, attacking what they term “woke capitalism” and dragging businesses, their onetime allies, into the culture wars.

The rancor escalated on Tuesday as Republicans in Congress used their new majority in the House to vote by a margin of 216 to 204 to repeal a Department of Labor rule that allows retirement funds to consider climate change and other factors when choosing companies in which to invest. In the Senate, Republicans are lining up behind a similar effort that has been joined by Senator Joe Manchin III, Democrat of West Virginia.

The Capitol Hill strategy has pulled President Biden into the fray, with the White House saying Mr. Biden will veto any bill to overturn the rule.

As if to underscore the issue’s sudden visibility, former Vice President Mike Pence let loose on Twitter on Tuesday. “Disappointing that President Biden is putting E.S.G. and woke policies above hard-working Americans’ retirement accounts!” wrote Mr. Pence, a potential 2024 candidate for the White House. “We will keep fighting until we put a stop to E.S.G. once and for all!”

E.S.G. investing has been routine on Wall Street for years. Most major companies issue extensive reports about their efforts to combat climate change and commitment to workplace diversity.

But in recent months, conservatives have increasingly attacked the practice, arguing that it promotes liberal priorities ranging from renewable energy to the Black Lives Matter movement.

And while E.S.G. applies to everything from diversity among corporate leaders to corruption controls, it’s the “E” in E.S.G. — the idea that the private sector needs to consider its impact on the environment — that has emerged as the top target of Republicans.

Officials in Republican-led states argue that it would lead to disinvestment in fossil fuel companies that provide tax revenue and jobs in their states, making it a top target of right-wing commentators and politicians.

“E.S.G. has been caught in the culture war cross hairs in the U.S.,” said Alexandra Mihailescu Cichon, executive vice president at RepRisk, a company that helps corporations track their E.S.G. goals. “It’s become a liberal versus conservative, Democrat versus Republican issue.”

The Labor Department rule is likely to remain on the books, as Republicans do not appear to have the votes to overturn a promised veto.

But the House vote on Tuesday was just the start of what’s expected to be a lengthy campaign against E.S.G.

Already this month, Representative Patrick McHenry, the North Carolina Republican who leads the House Financial Services Committee, announced the formation of a “Republican E.S.G. Working Group.” Republicans plan hearings this year at which conservative lawmakers are likely to grill executives from some of the nation’s biggest banks on their views about climate change, social issues and more.

There are some indications that the conservative pushback is gaining traction. Vanguard, one of the world’s largest investment firms, recently withdrew from the Net Zero Asset Managers initiative, an effort intended to get institutional money managers engaged in the fight against climate change.

BlackRock, the world’s largest asset manager, has been going out of its way to remind politicians that it still invests in fossil fuel industries, even as it supports efforts to reduce planet warming emissions.

“We are seeing major companies respond to this political pressure,” said Representative Sean Casten, Democrat of Illinois, who last month helped start the House Sustainable Investing caucus and who is a proponent of E.S.G. investing.

Even before Tuesday’s vote on Capitol Hill, the Labor Department rule had drawn a legal challenge from 25 Republican attorneys general, led by Ken Paxton of Texas.

As the Securities and Exchange Commission considers a new rule that would require corporations to disclose their carbon emissions, industry groups and Republican lawmakers have been pushing to limit its scope.

Around the country, Republican state treasurers have been withdrawing billions of dollars from firms like BlackRock that they deem “woke.”

And Vivek Ramaswamy, a conservative businessman and commentator, has created what he considers an apolitical investment firm, Strive Asset Management, positioning it as an alternative to BlackRock. Mr. Ramaswamy recently announced he was running for president on what is effectively an anti-E.S.G. platform.

To the ranks of wonky risk management professionals who have toiled over the minutia of E.S.G. reports for decades now, the political fracas is perplexing.

“Until very recently it was both obscure and also just accepted as a general part of investing,” said Josh Lichtenstein, a partner at the law firm Ropes & Gray who is tracking the E.S.G. backlash.

The term E.S.G. was first introduced in a 2004 report prepared by the United Nations and 20 financial firms including Goldman Sachs, Morgan Stanley and UBS.

As more companies began talking about their efforts to combat climate change and improve diversity, the issue was pushed to the forefront of the corporate agenda. Among the loudest proponents of E.S.G. has been Larry Fink, the chief executive of BlackRock, who has called on companies to reach beyond profit statements to consider the role the private sector could play in addressing societal problems.

That advocacy has made him a target of scathing critiques from conservative commentators and politicians, as well as dark conspiracy theories.

“For the first time in my professional career, attacks are now personal,” Mr. Fink said at the World Economic Forum’s annual meeting in Davos last month. “They’re trying to demonize the issues.”

The current E.S.G. backlash can be traced to Texas, where in 2020 oil executives began complaining that big banks like JPMorgan had stopped lending them money.

Republican legislators in Austin, as well as officials at the Texas Railroad Commission, the state’s energy regulator, took up their cause.

“If E.S.G. is not put in check, not only will future retirees face challenges in the years ahead, but we could see record bankruptcies and layoffs in the energy sector,” Wayne Christian, one of the railroad commissioners, said in 2021.

That year, Gov. Gregg Abbott signed a law prohibiting the state from contracting with or investing in any business that was “boycotting” fossil fuels.

Since then, others have taken up the fight against E.S.G.

The Heritage Foundation, one of the country’s most prominent conservative think tanks, is producing a series of articles and podcasts explaining why it sees E.S.G. as a threat to the American way of life.

“E.S.G. is a direct assault on the heart and soul of the free market economy,” said Andrew Olivastro, an executive at the Heritage Foundation. “I see E.S.G. as the broad umbrella for, you know, a nexus of the administrative state and the managerial class. And it has zero to do with advancing human progress around individuals and families.”

It is unclear whether applying environmental and social principles to investing is actually good for business. Some studies have shown that companies that embrace environmental and social goals outperform their peers in the long run. But other studies show the opposite. And as the stock market slumped last year, oil and gas stock prices rose sharply.

Another point of contention is that E.S.G. rankings, which are compiled by companies like S&P Global, arrive at sometimes counterintuitive conclusions about which companies are doing the most for the environment and society.

Last year Elon Musk lashed out after Tesla, his electric car company, was ousted from a major ranking of companies with the best E.S.G. scores, while Exxon Mobil, one of the world’s biggest oil producers, was included. “E.S.G. is a scam,” he wrote on Twitter. “It has been weaponized by phony social justice warriors.”

Senator Sheldon Whitehouse, Democrat of Rhode Island, said he believed the Republican position on E.S.G. was more about ginning up outrage than about just how much of a financial risk climate change posed to long term investments.

“They invent culture-war provocations that drive clicks, and woke capitalism is part of that,” he said.

Mr. Whitehouse added that he believed the fossil fuel industry was responsible for funding much of the pushback. Groups like the Texas Public Policy Foundation, which has been opposing climate action around the country, are supported by oil and gas companies. And the oil and gas industry continues to donate to Republicans at a far greater rate than it does to Democrats, according to data compiled by OpenSecrets.

And yet with each week, Republicans around the country are intensifying their campaign.

This month, Gov. Ron DeSantis of Florida said he would seek to bar the state from considering E.S.G. factors when issuing municipal bonds. And a group of Republican attorneys general recently challenged the two major proxy advisory firms, which influence how investors vote their shares, over their consideration of climate and social goals when making recommendations.

Financial institutions caught in the middle of the fight say it makes their work difficult.

“It is having an impact,” said Ivan Frishberg, chief sustainability officer of Amalgamated Bank. “It’s a chilling one. It’s a complicated one. And none of that is good for business.”