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Topeka, Kan – Conservative Republicans who want to block social and environmental investment are now being pushed back by fears of a backlash from powerful business groups and large losses of government pension systems.
In both Kansas and Indiana, where the GOP holds sway, bankers associations and state chambers of commerce have criticized strong versions of anti-ESG legislation that is now widely viewed as anti-free market.
In Kansas, their opposition prompted a Senate committee chairman to leave anti-ESG laws to firms that oversee private investments ahead of hearings this week. A Kansas committee was scheduled to vote Thursday, but postponed action on the anti-ESG bill after teachers and state workers warned the head of the State Employees Retirement System could face losses of $3.6 billion.
Last month, Indiana legislative analysts reported that the first version of the House bill for the pension system expected to cost the system $6.7 billion over 10 years, prompting lawmakers to rewrite it before the House approved it.
ESG stands for environmental, social and governance, and its use in investing has inspired GOP experiments in recent years. Now, those efforts are bolstering groups allied with Republicans in favor of minimal government regulation.
“That’s the fundamental political nature of this: a forum for responsible and sustainable investment,” said Brian McGannon, Acting CEO and Managing Director of the US SIF. “They’re not really thinking about the consequences of real-world influences. What does this mean in the financial system?
One-eighth of professionally managed US wealth, or $8.4 trillion, is being managed with ESG principles, according to a December report from the US SIF, which promotes sustainable investing.
At least seven states, including Oklahoma, Texas and West Virginia, have enacted anti-ESG laws in the past two years. GOP Govs. Ron DeSantis of Florida and Greg Gianforte of Montana have moved to ensure that their states’ funds are not invested using ESG principles.
Critics of ESG argue that using investments to move America away from fossil fuels, address gun violence, or sacrifice abortion rights for investors and defund public pensions.
“An agent investing on behalf of the principal has a fiduciary duty to put the principal’s interests ahead of the agent’s interests,” Kansas Attorney General Chris Kobach, a conservative Republican, told a state Senate committee this week. “This principle is such a staple of American law.”
Anti-ESG efforts also receive support from companies and industries such as oil and natural gas producers. In an Indiana House committee hearing last month, lawmakers heard several complaints from businesses about problems with corporate ESG policies, including those on coal mining and weapons production.
“This is, again, a social agenda that’s chasing something they shouldn’t be chasing,” said Mike Thompson, chairman of the Kansas Senate committee, which called ESG investments “potentially dangerous.”
Public pension funds are caught in the debate as the biggest institutional investors: Kansas’ system has $25 billion in assets and Indiana’s has $45 billion. NASRA, the association that represents American state pension fund managers, opposes any move, including on both sides of the ESG debate, that goes beyond making the safety of pension fund assets a “primary goal.”
In Kansas, Thompson scrambled Wednesday to set up behind-the-scenes talks to address concerns about the state’s pension system.
Its executive director, Alan Conroy, said the current proposals from Kansas lawmakers are so broad that the state pension system can’t hire or retain an investment manager who has “done anything in that ESG world.” He testified that the pension system should fire them all. , said they could hire new ones and get lower returns on investment.
Similar concerns were raised in Indiana, but after council members amended their bill, the pension system backed off the figure for projected losses.
Proponents say ESG isn’t about cutting out certain industries or companies, but about doing a better job of assessing future risks, such as from large-scale disasters or pollution or declining local water supplies. They argue that considering these factors is part of the investment manager’s duty to get the best possible return.
“The free market is trying to create a better risk assessment framework,” said Zach Pistora, a lobbyist for the Sierra Club in Kansas.
In Kansas, the Bankers and Credit Unions Association and the state Chamber of Commerce have moved against a tougher version of the anti-ESG law, neutralizing all or most of its milder cousins. In Indiana, the state legislature supported a more limited version.
Eric Stafford, a veteran lobbyist for the Kansas Chamber of Commerce, said free markets will make corrections if ESG investing produces less returns. And Alex Orrell, a lobbyist for the Kansas Bankers Association, worries about the political “pendulum.”
He said, “You swing too far to the right, you swing back and it hits you in the face.”
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Davis reported from Indianapolis.
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Follow John Hanna on Twitter: https://twitter.com/apjdhanna
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