Political Backlash Might Be One of the Better Things to Happen to ESG in the U.S. Embrace it.


Dan Mistler

Publish Date




  • ESG

If you call the U.S. home, as I do, and you read the news, you are likely pummeled with conflicting messages about the term “ESG” (an abbreviation for “environmental, social, and governance”). Some of these perspectives offer a fair critique of ESG practices, noting confusion in what warrants an ESG label, which in turn creates the opportunity for exaggerated claims about the potential ESG-related characteristics of a given investment, or “greenwashing.” Others have questioned the financial performance of ESG investment strategies, doubting if these strategies can provide adequate returns. But many of the perspectives on ESG that are generating the most attention – and that are influencing policy in the more conservative parts of the United States – question the motivations behind various ESG practices, assuming that at heart, ESG places “woke” leftist politics ahead of fiduciary duty to shareholders.

While there have been numerous pieces written that attempt to define (or redefine) what ESG is and characterize the financial value of employing various ESG strategies1,  the current debate around the political motivations within ESG – and the pressure that conservative state attorneys general are placing on funds – is still dominated by misleading rhetoric and seemingly willful ignorance. While the proposals vary by state, the political pushback on ESG strategies is generally anchored in two lines of argument:

  1. Certain ESG-related investment exclusions run counter to the priorities of a given state’s constituencies. These arguments can be found in what are referred to as anti-ESG boycott proposals. ESG policies can include sector-based exclusionary guidelines – or boycotts – which can incidentally target sectors that have outsized importance to certain state economies, e.g., fossil fuels in Texas, tobacco in Kentucky, etc. As a result, the argument goes, it should be unacceptable for a state’s money to be managed in a way that does not support the industries that are most critical to that state’s economy. As of August 25, 16 of the 18 states that have targeted such exclusionary guidelines are implementing or attempting to implement anti-ESG boycott policies.
  2. Integration of ESG factors into investment analysis is usurped by political agendas and does not constitute valid financial analysis, thus running afoul of the sole fiduciary duty priority of maximizing returns. The ESG practitioner community has been swift in reacting to this charge by illustrating the supportive relationship that ESG analysis has with minimizing risk and maximizing returns. However, the basic suspicion remains that ESG is actually just a leftist political ideology wolf in fundamental investment analysis sheep’s clothing. Two of the 18 states (as of Aug 25) that have targeted such rules are implementing or attempting to implement anti-ESG integration policies.

There is worry within the investment manager ecosystem that these anti-ESG integration bills will have broader implications, effectively working to limit investment opportunities. For example, Texas’s “blacklist” approach to implementation of these rules, despite evidence presented to the contrary from targets like Blackrock, would effectively equate to a kind of ideological divestment of its own if taken at face value. However, these categorical political endeavors are not necessarily supported by the text of these bills, which allow for ESG integration that serves investment risk/return. For example, both the Florida and North Dakota bills include permissions for the below:

  • Florida: “The board may not subordinate the interests of the participants and beneficiaries to other objectives and may not sacrifice investment return or take additional risk to promote any non-pecuniary factors.”

As such, if ESG is considered solely to benefit return, then it appears to be permissible.

  • North Dakota: “As used in this section, 'social investment' means the consideration of socially responsible criteria in the investment or commitment of public funds for the purpose of obtaining an effect other than maximized return to the state. Except otherwise provided in state investment policy regarding to the investment of the legacy fund and unless the state investment board can demonstrate a social investment would provide an equivalent or superior return compared to a similar investment that is not a social investment and has a similar time horizon and risk, the state investment board may not invest state funds for the purpose of social investment.”

Here North Dakota goes further than Florida to condone social investment (or an investment seeking a social outcome) as long as it doesn’t sacrifice return.

In describing these policies, political figures have distorted the meaning of exclusionary policies and suggested that these represent total bans on ESG analysis and thinking. However, despite the heated rhetoric that races towards extreme conclusions from ESG investments to further political interests, neither state precludes ESG integration for enhanced risk/return – which, unless you are managing an ESG-labeled product, should be the only way you are integrating ESG.

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Initially, this seemed like just one more costly distraction peddled by politicians, but many of these interactions have actually been…healthy. In fact, the anti-ESG legislation is likely to have several positive implications for ESG investment strategies, including:

  • Instances of greenwashing may be rooted out faster. When ESG procedures are put under a microscope, regardless of the reason why, loosely developed approaches will be uncovered. This is also the intent behind the SEC’s focus on ESG. And while the fear of the commercial fallout from an SEC action or lawsuit is palpable, large investors challenging their managers’ ESG approaches can have a similar effect and do so in shorter order. This pressure should reduce instances of claims exaggerating procedures, which is classic greenwashing.
  • ESG procedures overall may strengthen. The increased scrutiny forces managers to defend and tighten their approaches, providing more specificity in policies, procedures, and disclosures. Managers will need to self-assess with a critical eye and be prepared to provide evidence with transparent data about how ESG assessment supports risk/return analysis, for example. Firms that are unable or unwilling to address these questions/pressures really shouldn’t make claims around ESG integration anyway. ESG integration without a structured program that includes oversight and testing will be deemed hollow and over time cease to exist. 
  • Stakeholders with differing viewpoints may find a more constructive voice in the ESG conversation. While U.S. LPs are caring more and more about ESG, the practice has long been dominated by the preferences of European pools of capital with more progressive ESG thinking. Broadening the conversation in the U.S. and including those historically critical of the practice will lead to a more diverse audience engaged on the topic, which should make discussions around ESG a more common practice. 
  • Firms may sharpen their definitions of ESG. “ESG” has become tortured nomenclature, with little consistency in how firms have used the term or what concepts are included in it. In response to laws like those passed in North Dakota and Florida, firms that wish to continue to engage in ESG-related strategies will be forced to clarify how ESG factors are included in their strategies and the risk and return that these factors are expected to have. These clarifications should result in a better understanding of what ESG really is, for investors of all political viewpoints.
  • ESG as a practice may emerge with even broader support. Media echo chambers make it easy to misunderstand the truly global nature of alignment with ESG integration. In many regions outside the U.S., ESG analysis as a basic practice enjoys near-total support because it is seen as adding value to funds and investment strategies. The common ground established between GPs and critical LPs will serve to add momentum to adoption here in the U.S. 

Key takeaways

This political debate around ESG investing has some important takeaways for anyone in the investment world wondering what this means going forward:

  • There is far more to be gained from engagement and dialogue than assumption and strategic avoidance. The basic tenets of ESG integration are hard for anyone to challenge because they so closely support risk/return priorities. Agreeing on these foundational points can provide shared perspective to build on, which is the first step in turning critics into supporters.
  • Anti-ESG funds may still be subject to the SEC’s proposed ESG Funds rule. The proposal does not clearly define what ESG means, and instead requires funds to define their own parameters to hold themselves accountable. The specific disclosure requirements will remain the same – integration, focus, and impact.
  • Anti-ESG campaigns are generally less likely to prove successful. While certain states will have “victories” at pushing out ESG-labeled funds (e.g., Texas), the expansion of investor interest in ESG is unlikely to slow anytime soon, especially with more and more investors taking an active interest in issues such as climate. There is also pushback on anti-ESG legislation coming from inside the investment community that runs against political interests of any kind that limit individual investment opportunities. We are already seeing this with regard to anti-ESG shareholder proposals2 and it is likely that this criticism and the investor engagement that it is creating will generally lead to more ESG adoption, not less.
  • Now is the time to double down on your ESG approach. More than a quarter of global investors say ESG is central to their investment approach (26% vs. 28% in 2021), according to a Global ESG Study from Capital Group. While a higher proportion this year describe their ESG stance as one of “acceptance” (34% vs. 32%) and “compliance” (29% vs. 24%). Pausing will only delay inevitable potential conflict if misalignment exists between what you are doing and what your investors assume that this means. Asset managers have a variety of customers, and the demand from many of those customers is only continuing to grow. The only way to serve them all is to develop detailed, tailored, and highly specific ESG integration approaches that are centered on fundamental investment analysis and directly serve risk/return. 

How we help

Whether your firm is just getting started in Environmental, Social and Governance (ESG) investing, or you have an established program but need assistance with ESG compliance and measurement, ACA Group’s ESG Advisory Services can help.

We are the leading governance, risk, and compliance (GRC) advisor in financial services, and we’re experts in helping firms develop and monitor ESG programs to mitigate risk, make informed choices, grow profitably and sustainably, and combat greenwashing.

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For examples, see: “What is ESG? Definition and Meaning”; “Does ESG Really Matter – and Why?”; “ESG Investing: Practices, Progress, and Challenges”; “Introduction to ESG”; etc.

2 https://www.morningstar.ca/ca/news/225811/anti-esg-proxy-explosion-ends-with-a-whimper-not-a-bang.aspx