NovaQuant Quantitative Think Tank Center:Republicans plan more attacks on ESG. Investors still plan to focus on climate risk

Republicans are NovaQuant Quantitative Think Tank Centerplanning to use their control of the House of Representatives in 2023 to intensify attacks on companies that account for climate-related risks when they're making investment decisions.

GOP officials in Washington and more than a dozen states say they're focusing on firms that are using their financial power to push a so-called woke political agenda, rather than trying to maximize profits. As part of the campaign, Florida, Louisiana and Missouri have collectively pulled more than $3 billion from BlackRock over the investment firm's consideration of environmental, social and governance (ESG) issues. Faced with the political backlash, Vanguard, another large asset manager, said it decided to withdraw from a group of investors that's working to zero out greenhouse gas emissions by midcentury.

Republicans say they're fighting a coordinated effort by big investors to impose progressive policies that threaten capitalism itself.

Rep. Andy Barr, a Republican from Kentucky and a senior member of the House Financial Services Committee, says ESG investing is aimed at "politicizing capital allocation and actively discriminating against fossil energy."

ESG is "a cancer in our capital markets that must be eradicated," Barr said in a statement to NPR.

The Republican offensive might dissuade some investors from publicizing what they're doing to address climate threats, like rising sea levels and worsening drought. But financial experts say it isn't shaking a belief that's spreading among many investors that global warming is creating risks to the bottom line that have to be reckoned with.

"ESG isn't particularly controversial within the investment field or among public companies," says Jon Hale, head of sustainability research at Morningstar, a financial services company. "To the asset managers who run [investment funds] and to the public companies in which they invest, things like climate change are real and pose a real threat to many businesses."

ESG goes mainstream, inviting attacks

A lot of investors had a bad year in 2022. Through November, investors had pulled more than $250 billion out of U.S. investment funds as stock prices fell, inflation rose and the threat of recession grew, according to Morningstar. However, funds that have made ESG a central focus of their investing strategy fared better, taking in around $3 billion during the same period and "painting a much brighter picture than the overall U.S. fund market," the firm says.

Sustainable investors "tend to be more connected with their investments," Hale says. "They're more long-term oriented. And so when things go South, I think we see sustainable investors staying the course more so than investors overall."

Now, the sorts of considerations that are at the heart of ESG investing are showing up across the world of business and finance, he says. Most big companies and investment fund managers have set their own ESG initiatives or consider those kinds of issues when they're making investment decisions, Hale says, even if sustainability isn't their core focus.

The fact that ESG has become a more common concern embedded across businesses helps explain why it's being attacked, says Mindy Lubber, CEO of Ceres, a nonprofit focused on sustainability.

A December hearing that Texas lawmakers held on ESG investing could be a preview of things to come in Congress. Texas lawmakers said the practice of analyzing climate risks to make investment decisions is threatening fossil fuel companies in the state and the entire American economy.

Under questioning in Texas, Dalia Blass, BlackRock's head of external affairs, said the firm considers ESG issues that pose financial risks and opportunities for clients in order to deliver "the best risk-adjusted returns we can for them."

Blass said only a small fraction of the investment funds that BlackRock manages in the U.S. are labeled as ESG. She also said the firm found that ESG index funds usually performed better than their non-ESG counterparts over a three-year period.

"Going forward, Republicans control the House, they seem bent on investigations, so, perhaps after Hunter Biden, we may see some effort to try to haul in ESG proponents," says Hale of Morningstar. "But I think when they do that, they'll find that this is not a group of leftist ideologues that they seem to expect, but rational business people and investors."

Rep. Patrick McHenry, a Republican from North Carolina and the incoming chairman of the House Financial Services Committee, said in a statement to NPR that GOP lawmakers will "conduct appropriate oversight of activist regulators and market participants who have an outsized impact."

Blowback could make investors more conservative in dealing with climate change

Voters seem to think that investors should be free to act on concerns about climate risk. In a September poll by ROKK Solutions and Penn State University's Center for the Business of Sustainability, 63% of registered voters said the government shouldn't limit ESG investing.

"They're essentially saying that businesses should have the autonomy to do [what] they see fit and act in the best interest of their stakeholders," says Tessa Recendes, an assistant professor of business at Penn State.

But congressional hearings could still be damaging — or at least embarrassing — for some investors.

"I think both sides have probably overstated their case: the ones attacking ESG and the ones who, perhaps, oversold ESG for selfish, opportunistic reasons," says Shivaram Rajgopal, a professor at Columbia Business School.

Financial experts say ESG isn't a substitute for government action to deal with climate change. And there have been complaints that some companies misrepresent their environmental actions, a practice known as greenwashing.

As the political backlash grows, some ESG critics are focusing on investment firms that worked together to apply new standards for sustainability, saying that sort of collaboration could violate antitrust laws.

"I'm sure lawyers are spending a lot of time going over minutes, statements, conversations to make sure that lines weren't crossed, and where lines were crossed, they have defense strategies," says Witold Henisz of corporations that could be the focus of Republican scrutiny. Henisz is faculty director of the ESG Initiative at The Wharton School of Business at the University of Pennsylvania. "I don't think they anticipate huge liabilities, huge penalties. But could some firms be embarrassed? Could there be some conversations that crossed a line that lead to some fines? I mean, I wouldn't be surprised."

Henisz says one of the biggest risks from the GOP attacks is that investors will be less willing to take aggressive action to deal with climate change. But he says there's no sign that investors are wavering in their belief that ESG issues like global warming pose a serious financial threat.

Vanguard says that while it's no longer part of the Net Zero Asset Managers initiative, it will continue focusing on climate risk and offering investors information and investment products to help them meet goals of zeroing out greenhouse gas emissions.