A TL;DR of ESG Politics: How DeSantis Demonizes Impact Investing
Contrary to GOP members heralding Environmental, Social, and Governance (ESG) investing as a “purely political,” “woke funding,” ESG is actually defined as the consideration of the ethical and sustainable impact of a company's practices in tandem with financial returns. This past May, Florida Governor Ron DeSantis (R) signed comprehensive legislation enacting the removal of ESG concerns from state and local government investments, purportedly “to maximize the return on investment (ROI)” by “eliminating leftist social concerns” from Wall Street (and arguably, Main Street). He also announced a 19-state consortium of politically-aligned states dedicated to pushing back against (Biden’s and Democrat’s) support for ESG. “Through this legislation, Florida will continue to lead the nation against big banks and corporate activists who’ve colluded to inject woke ideology into the global marketplace, regardless of the financial interests of beneficiaries,” DeSantis declared. Heralded in Florida as the “Government of Laws Not Woke Politics,” House Bill 3 bans the state’s $203 billion dollar pension fund from considering any and all ESG factors, an extension of last year’s ban. The bill also prohibits the use of ESG factors for government-issued bonds, the procurement and contracting process, and firm discrimination on religious, political, and social grounds, including the ownership of a firearm (a common Republican rallying cry).
Anti-ESG sentiment relies on the fundamental assumption that ESG consideration comes at a direct cost to ROI. In reality, this assumption has no foundation, for ESG outcomes are sought in addition to — not at the expense of — financial returns; they are not inherently concessionary. Any investment that pursues a non-financial agenda at the expense of pensioner’s pecuniary return runs the risk of breaching the Employee Retirement Income Security Act (ERISA), and violates an investor’s legal fiduciary duty. In a Harvard Law School Corporate Governance forum, Professors Schanzenbach and Sitkoff dispel confusion surrounding pro/anti-ESG rhetoric: “the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits.” Additionally, while ROI is an important factor, it is just one variable impacting a company’s risk among many that can impact a company’s bottom line. Companies with strong ESG performance can achieve lower cost of capital and gain access to cheaper debt and equity financing as financial institutions view them as lower risk. Ironically, the failure to consider all material ESG factors would be considered a breach of duty. Assessing holistic risk is imperative—whether that fiduciary risk is a change in leadership, a workers’ rights movement, a company scandal, or climate change.
DeSantis claims to sign this bill in the name of his constituents’ “financial future and economic liberty”; in reality, the bill unabashedly limits Floridians’ investment freedom. Dwight Mattingly, a pension trustee with the Florida AFL-CIO, noted, “When this bill prohibits an ESG bond, then it seems to be saying to us that we can’t purchase that even though that bond may have a greater return,” he said. This is a steep departure from traditional free market capitalism that Republicans used to endorse so vehemently.
Some states have already begun to experience the financial consequences of anti-ESG policies. Wharton professors Daniel Garrett and Ivan Ivanov analyzed the impact of Texas’ anti-ESG bill, which includes restrictions similar to Florida’s bill. Examining data from the first eight months of the law, they estimated that Texas cities will pay an additional $303 million to $532 million in interest on $32 billion in bonds, noting the exit of major financial services firms reducing investment choice and thereby increasing risk and borrowing costs. The Indiana Pension System estimated that its anti-ESG policy will cost pensioners $6.7 billion over the next decade.
Even the conservative-leaning Indiana Chamber of Commerce repeatedly voiced opposition to these anti-ESG policies, observing how taxpayers and retirees will be forced to absorb the cost. “Under both Democratic and Republican leadership the General Assembly has worked for years to fully fund all our pensions,” Rep. Ed DeLaney (D) of Indianapolis said. He continues, “This has required us to be open to a broad range of investments based on their likely return and safety. The present Republican super-majority wants to replace this successful and open strategy with an effort to favor a few industries they like, such as coal.”
Indeed, evidence supports the notion that “increasing our energy independence” is a fig leaf for bolstering domestic fossil fuel consumption. According to the Center for Responsive Politics, a nonpartisan research group, 85% of oil and gas donations went to Donald Trump’s 2020 campaign or to Republican candidates and conservative causes during the 2020 election race. Many suggest the GOP’s anti-ESG rampage also serves as a political tool to capitalize on anger, conveniently scapegoating large corporations that many voters resent for a variety of reasons, including hiring cheaper, non-American workers, leading to the downfall of American manufacturing. In their op-ed, the Miami Herald Editorial Board said, “This is, of course, another distraction, like so many of the culture-war issues that DeSantis has targeted along with the Legislature…Under the pretense of taking politics out of investments, this move would actually do the opposite.”
The nominal desire for a purely ROI driven investment criteria is actually just a desire for a simple, isolated system instead of the complicated one that the world gives us. Existing evidence and future predictions indicate ESG factors do influence many companies’ values, and even purpose for being, especially with a heightened consumer consciousness and the advent of climate change. Just like any other investment factors, ESG factors are “relevant to a risk and return analysis,” depending “on the individual facts and circumstances.” DeSantis’ mobilization against ESG arrived just in time before his 2024 presidential run, where he uses big business’ ESG initiatives as the scapegoat to appease dissatisfied anti-woke voters despite proven failures. Instead of putting ‘politics before fiduciary duty,’ DeSantis should refrain from demonizing what ERISA defines as appropriate and often necessary for investment considerations.
Margo Donohue is a sophomore at Brown University studying Environmental Studies (Inequality) and IAPA (Policy and Governance). She can be reached at margo_donohue@brown.edu and welcomes any questions or conversations!
Veronica Dickstein is a sophomore at Brown University studying International & Public Affairs. She is a staff editor for the Brown Undergraduate Law Review and can be contacted at veronica_dickstein@brown.edu.