The Backlash Against ESG Faces Its Own Backlash

Illustration by II

Illustration by II

Pension funds in red states say culture-war policies are interfering with the market and could cost retirees and taxpayers billions.

When Woke, Inc. author Vivek Ramaswamy launched his asset management firm less than a year ago, he claimed its goal was to take politics out of business decisions. Slamming the notion of stakeholder capitalism and the movement to embrace environmental, social, and governance, or ESG, principles as “woke,” Ramaswamy said his firm would push companies to “focus on excellence over politics.”

Now it appears that Ramaswamy’s anti-ESG message — which has been embraced by Republican politicians in dozens of states and is fueling a presidential bid by Ramaswamy — is having the exact opposite effect. State pension funds or other powerful players in at least five Republican-controlled states say that instead of creating excellence, these new culture-war policies are interfering with the market and could cost pensioners and taxpayers billions of dollars.

What Ramaswamy failed to mention when he launched Strive Asset Management last year was that for months he had been crisscrossing the country with Republican politicians to promote an agenda in which they had common ground: pulling state pension money from BlackRock, whose policies they viewed as anathema to the fossil-fuel industry even though BlackRock says it has $170 billion invested in U.S. publicly traded energy companies and is not planning to divest from them. BlackRock CEO Larry Fink, the bête noire of the anti-ESG movement, has said that the stakeholder capitalism he endorses has nothing to do with politics and is not “woke.” But BlackRock has pushed companies to take sustainability seriously, and at least six red states have already pulled more than $4 billion from the money management giant.

The Republican-state-led anti-ESG effort, which was launched by Texas in 2021, is multipronged. In terms of legislation, there are two types of bills. So-called boycott bills typically target financial institutions deemed to be discriminating or “boycotting” the fossil-fuel and firearms industries and prohibit state entities from doing business with those institutions on matters like municipal bond underwriting. Then there are so-called no-ESG bills that force state pension funds to divest from firms or strategies that consider ESG factors when making investments. These bills also want to make sure that the pension funds’ managers aren’t voting the funds’ proxies on ESG-related issues. But while such bills are in the works, most states have either not passed or not implemented them. And in lieu of legislation, some state attorneys general are filing lawsuits, while treasurers and comptrollers are issuing their own anti-woke rules.

The overreach is so broad that even pension funds in deep-red states are pushing back. Last month, the Kentucky County Employees Retirement System wrote a letter to Kentucky State Treasurer Allison Ball in which it said that her requirement that the pension fund divest from companies her office deemed as boycotting the energy sector — including BlackRock, JPMorgan Chase & Co., and Citigroup, among others — was “inconsistent” with the pension’s fiduciary obligations.


“Our fiduciary duty is to the members and the beneficiaries of the plan,” George Cheatham, a trustee, tells Institutional Investor. The Kentucky retirement system concluded that following Ball’s divestment policy would violate its own legal obligations.

“We don’t take ESG into account when evaluating a money manager,” explains Cheatham. “We solely base that on the asset class we happen to be dealing with and what their returns have been.” As a result, the fund’s attorneys have determined the fund is exempt from the state treasurer’s demands.

“The process that we would have to go through to divest and then find a new place to invest those dollars would be costly,” Cheatham adds. (Ball’s office did not respond to a request for comment.)

In Indiana, which borders Kentucky, the Legislative Service Agency’s Office of Fiscal and Management Analysis estimated that a bill requiring that the state pension system, and a few others, divest from firms engaged in ESG investing would cost $6.7 billion over the next decade — lowering returns for the defined benefit pensions from 6.25 percent to 5.05 percent annually. Those numbers were an estimate created by the Indiana Public Retirement System, leading the Office of Fiscal and Management Analysis to conclude in its published analysis that the bill would “likely result in increased expenditures for state employers for pension contributions.”

The number was so huge that Republican state legislators quickly amended their bill to exclude private equity and hedge funds from many of its provisions.

State legislators used a revised Indiana Public Retirement System analysis to claim that the revamped legislation would cost only $5.5 million in administrative costs related to proxy voting over the next decade. But the Legislature’s own budget office would not put a number on the ultimate cost. “Potentially, the funds may earn a lower rate of return as a result of divestment or if enforcement of the bill limits the pool of investment managers as a result of the requirements of the bill,” the office said in an updated analysis.

Republicans supporting the legislation are “willing to take a loss,” says Indiana state Rep. Ed Delaney, a Democrat who opposed both bills. “They don’t want to know exactly what it is. And if it occurs, they don’t want to see it or recognize it.”

Indiana does not have a big fossil-fuel industry, but the coal industry used to be a significant employer there and there is “nostalgia” for coal, Delaney says. “We have thousands of people who lost jobs in the coal industry and who saw their community shrink,” he says, but “having lost your job, having seen your town shrink, now [Republicans] want your pension to shrink.”

“The thing that bothers me in many ways is I think they’re undermining public confidence in the public pension system, and that’s a very bad thing,” he adds.

Kansas lawmakers also rejected an anti-ESG bill after Kansas Public Employees Retirement System executive director Alan Conroy estimated that a law banning it from hiring certain firms that lawmakers said disdain fossil fuels would cost the pension as much as $82 million a year, according to a watchdog group called Documented, which found copies of the emails. (Conroy’s office says it is working on the latest ESG testimony that he will present to Kansas Senate and House committees on Wednesday based on this year’s bills.)

“These state legislators are playing politics with our pension plans,” Brandon Rees, deputy director of the AFL-CIO Office of Investment, said at a recent panel discussion on retirement savings and climate risk put together by Americans for Financial Reform, a progressive activist nonprofit. Since the Employee Retirement Income Security Act was first adopted in 1974, Rees noted, the U.S. Department of Labor “has expressly said that pension plans may not sacrifice investment returns, but that’s exactly what these bills are doing.”

While much of the debate over the ultimate costs may seem theoretical, the situation a Missouri pension fund faced when it withdrew its money from a BlackRock fund provides a real-life example.

In October, the Missouri State Employees’ Retirement System, or MOSERS, pulled its money from BlackRock, in part because the firm would not allow it to abstain from voting proxies for the pension fund, which MOSERS said would allow it to comply with Missouri’s new law. BlackRock allows its pension plan clients to vote their own proxies — undercutting the criticism of anti-woke crusaders like Ramaswamy who contend that BlackRock is voting against the interests of its clients. But because MOSERS was invested in a commingled product, BlackRock couldn’t allow the pension fund not to vote.

Missouri could have voted its own proxies, according to an individual familiar with the situation. Instead, MOSERS moved the money to another fund and used more expensive derivatives to replicate the exposure without having the obligation to vote, the individual explains. The difference in cost showed up in MOSERS’ annual report. According to it, BlackRock managed $656 million for the pension, collecting $1.2 million in total fees. But NISA Investment Advisors, which received some former BlackRock funds and manages $922 million for the pension, collected $5.4 million in fees. (MOSERS did not return a request for comment.)

The anti-ESG efforts by Republican state politicians are backfiring in other ways, even turning some local bankers and regulators against the party.

Led by Texas, several states have passed bills targeting banks they argue are boycotting energy companies and the gun industry. On the list are JPMorgan — one of the biggest energy lenders — Goldman Sachs, Credit Suisse, Bank of America, and Citigroup.

Interfering with the market in this way could cost Texas — which was the first to prohibit municipalities from contracting with banks expressing support for certain ESG policies — a bundle. It comes to $300 million to $500 million in additional interest on the $31.8 billion borrowed during the first eight months after it passed the law, according to a recent analysis by Wharton School professor Daniel Garrett and Federal Reserve Bank of Chicago senior economist Ivan Ivanov.

If Kentucky, Louisiana, Florida, Missouri, West Virginia, and Oklahoma follow the Texas model, altogether their municipal bond underwriting costs could jump between $264 million and $708 million per year, concluded a subsequent report by the Sunrise Project, a climate-focused nonprofit, which used the Texas analysis to make its estimates. Those six states have either adopted anti-ESG legislation or are considering blacklisting financial firms with ESG policies.

“The additional borrowing costs are essentially the result of reduced competition for the state’s government bond issues, resulting in higher interest costs for taxpayers for both competitive and negotiated issues,” the Sunrise Project analysis found.

Repercussions from the moves by Texas have left some states more skeptical about such legislation. For example, in North Dakota, a bill that would blacklist financial institutions deemed to be boycotting energy companies failed last month, in a 90-to-3 vote, after the North Dakota Department of Financial Institutions opposed it, in large part because of the lack of due process for those on the blacklist.

Even bankers in West Virginia, where the coal industry remains powerful, are against the financial boycott legislation.

“After much deliberation and debate, a significant majority of the 22 members of the West Virginia Bankers Association’s board of directors has voted to oppose S.B. 262,” the CEO of the association wrote in a Feb. 7 letter in reference to the planned legislation.

“We respect your efforts to protect our vital partners in the fossil-fuel sector,” the letter continued. “Our members are hopeful that you also respect our concerns with the significant government intrusion this legislation presents into the day-to-day operations and private business affairs of West Virginia’s banks and the dangerous legislative precedent this bill will establish. The abandonment of long-proven principles of minimal government interference in private industry for the purpose of achieving a short-term policy initiative is bad policy.”

The letter was a strong rebuke to West Virginia State Treasurer Riley Moore, to whom it was addressed. Moore has become a national figure promoting such legislation and is widely viewed as trying to use his anti-ESG rhetoric as a steppingstone to higher office.

Moore and Ramaswamy co-authored an opinion piece in The Wall Street Journal last summer and have spoken together at several meetings of conservative state lawmakers to press their case against ESG. (According to Documented, in the past year Strive Asset Management executives, including Ramaswamy, have approached elected fiduciaries and pension funds in at least six states — Alaska, Missouri, North Dakota, South Carolina, Utah, and West Virginia. The firm’s biggest product is its Strive U.S. Energy ETF, trading under the ticker DRLL, which mimics the BlackRock iShares U.S. Energy ETF.)

The West Virginia state treasurer is also involved with the State Financial Officers Foundation, a nonprofit lobbying group that has become a “central coordinating hub for anti-ESG efforts,” according to The New Republic. The top donor to SFOF is an organization with ties to Federalist Society co-chairman Leonard Leo, who is most famous for helping pack the U.S. Supreme Court with anti-abortion judges but has since shifted some of his efforts to the anti-ESG, anti-woke movement.

SFOF is also allied with the American Legislative Exchange Council, a conservative group of Republican legislators from 23 states that develops model legislation for the states to enact and is commonly referred to as ALEC. But in the face of resistance, in January the ALEC board rejected a bill modeled on the one passed by Texas and is in the process of revising it.

The proposed bills state that the investments cannot be made for a nonfinancial or “nonpecuniary” reason, says Indiana Rep. Delaney. Republican lawmakers are “using that term because they believe the investments are not driven by long-term perspectives on fossil fuels but are driven by politics.” He argues that “they think they’re being taken over by a group, and that happens to be huge East Coast establishments.”

BlackRock and other ESG proponents say that investing along ESG principles will drive returns higher in the long run. But there is still concern about how a pecuniary standard would be implemented.

A February 15 paper by David Berger, a partner at Wilson Sonsini Goodrich & Rosati, and David H. Webber, a professor at Boston University School of Law, laid out some of the problems in the ALEC model legislation, referring to it as a “legal quagmire.”

They argued that the distinction between pecuniary and nonpecuniary is “so blurry that the bills are self-contradictory” and also that “the transfer of control of proxy voting to elected officials [ensures] the politicization of such voting in direct conflict with the bills’ stated goals.”

In pointing to one of the more obvious contradictions, they noted that “Louisiana State Treasurer John Schroder explained his October 2022 decision to divest Louisiana pensions from BlackRock by stating, among other things, that ‘divestment is necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil-fuel sector.’” Schroder added, “I refuse to spend a penny of our state’s funds with a company that will take food off tables, money out of pockets, and jobs away from hardworking Louisianans.”

But protecting jobs is decidedly a social issue. As such, it “is more consistent with ESG investing than with their own, newly adopted or introduced anti-ESG legislation,” wrote Berger and Webber.

They concluded that the legislation would dramatically increase liability risk for plan fiduciaries and service providers without providing any corresponding or even offsetting benefits to fiduciaries or their members.

The blowback at the state level has not stopped Republicans in Congress from trying to create national policy by getting rid of a Biden-era DOL regulation that specifically permits — but does not require — corporate retirement plans to consider ESG when making investing decisions. The new DOL regulation replaces a Trump-era one banning ESG investing unless it was for “pecuniary” reasons following “widespread outcry from the investment community,” according to Berger and Webber.

Congress just passed a resolution tossing the new DOL regulation. The Republican-controlled House of Representatives voted along party lines, and two Democratic senators, Joe Manchin of West Virginia and Jon Tester of Montana, joined Republicans to give the resolution the simple majority needed to pass the Senate. President Joe Biden is expected to veto the resolution — which would be the first veto of his presidency — creating more grist for the Republican culture wars.

Sure enough, immediately after the vote, Ramaswamy weighed in on Twitter to note, “It’s telling that Biden’s first-ever veto relates to a defense of ESG.”

“This whole debate is just wrong,” says Indiana Rep. Delaney. “It’s off the point. The point is to try to make some money, not take too much risk, and keep the damn politicians out of it.”

Politicians, he says, “are not competent on this issue. Whether you’re in Washington or Indiana, [politicians] are not institutionally competent. If the ESG funds do poorly, well, then get rid of them. It’s just that simple.”