What is ESG? How climate-conscious investing has become the Idaho GOP’s new political foe
In February, conservative talk radio host and conspiracy theorist Glenn Beck told dozens of Idaho lawmakers that ESG, a scoring system for sustainable and socially responsible investing, is a global fascist conspiracy to assign people credit scores based on their politics — and conservatives will be targeted.
In the weeks after his visit to the Idaho Capitol, Republican lawmakers introduced three pieces of legislation, at Beck’s urging, meant to combat financial scrutiny based on environmental and social factors. One bill, which blocked public entities from considering ESG investing, passed along party lines and was signed into law.
But it appears Idaho Republicans aren’t done with ESG. Last week, Republican State Treasurer Julie Ellsworth and Sen. Mike Crapo, R-Idaho, hosted a roundtable discussion in which state officials and professional presenters decried ESG as a leftist agenda to undermine unsustainable business practices. Lawmakers said they’re working on legislation to combat it.
Most of the unrest is a result of recent proposals from the Securities and Exchange Commission, the federal government’s market regulator. Newly proposed rules would give investors more information about funds that use ESG factors.
One would require publicly traded companies to disclose their climate-related risks and greenhouse gas emissions. Other proposals would require more transparency around how asset managers label funds that put forward an ESG focus and how they measure progress toward ESG objectives.
“Imposing subjective standards to choke off capital to disfavored industries is a disservice to businesses, employees and investors,” said Crapo, who attended the Tuesday meeting virtually. “Unelected bureaucrats should not weaponize our financial system in this way.”
Banking and industry lobbyists told the Idaho Statesman their clients are wary of the new federal regulations. But some of the fears being spread about ESG, including Beck’s social credit score claims, are inaccurate or overstated, and they hope Idaho lawmakers will head back to the sidelines.
Alex LaBeau, president of the Idaho Association of Commerce and Industry, a business lobbying group, likened the scenario to the state’s response to the coronavirus pandemic, when many GOP lawmakers pushed for legislation blocking businesses from requiring masks and vaccines.
“These parties are trying to do all of these things to placate issues that they really have no business being involved in,” LaBeau told the Statesman by phone.
What is ESG?
ESG stands for environmental, social and governance. The acronym has become shorthand for an investment strategy that takes into account risk and reward based on those criteria.
In other words, what is a company’s impact on the environment (its carbon footprint, for example) or its viability based on environmental factors (like its vulnerability to climate change)? Is the company socially conscious — how does it treat its employees, how does it manage its community relationships? And are the company’s leaders trustworthy?
The environmental, social and governance components are “risk-based decisions that have been around for 100-plus years,” said Trent Wright, president and CEO of the Idaho Bankers Association.
“Banks make financial business decisions based on risk,” Wright said by phone. “If they’re going to lend to a small business, they want to make sure that the governance structure of that small business is such that they’re going to be successful in the long run, and be a good investment. … If it’s an environmental type of company, like coal, for example, they’re going to want to look at the long-term sustainability of the coal industry.”
As concerns over the effects of climate change rise, investors — from individuals to asset managers that oversee mutual funds and stock exchange funds — increasingly evaluate where to put their money based on ESG factors, and they look to ratings companies for assessments.
Some businesses voluntarily track and publicize ESG scores, to attract sustainability-minded investors.
“ESG reporting creates a way for companies to respond to customer demands — if shareholders want a company to become more environmentally sound, ESG scores can help track that progress,” said a recent blog from the Idaho Conservation League, a nonprofit advocacy group. “Some states, companies, and politicians oppose ESG because they fear that it represents a threat to their way of doing business.”
As of quarter four 2021, ESG-focused funds include more than $2.7 trillion in assets and could represent a third of all assets under management by 2025, Forbes reported this week.
Yet ESG is still poorly defined and its metrics lack standardization, experts say. Last year, the Wall Street Journal reported that the DWS Group, Deutsche Bank AG’s asset management arm, was overstating its sustainability efforts to investors. Curbing such practices — commonly known as “greenwashing” — is driving the federal regulatory proposals.
Gary Gensler, chairman of the Securities and Exchange Commission, compared the proposals to providing “objective figures” that disclose what makes fat-free milk fat free.
“Funds often disclose objective metrics as well,” Gensler said in a statement last month. “When doing so, investors get a window into the criteria used by the asset managers for the fund and the data that underlies the claim. When it comes to ESG investing, though, there’s currently a huge range of what asset managers might disclose or mean by their claims.”
ESG factors are used to evaluate governments, as well. On May 18, Idaho officials sent a letter to S&P Global Ratings, the credit rating agency, objecting to the company developing an ESG scorecard for states.
Idaho joined Utah in objecting “to any attempts at subjective quantification beyond the conservative and careful management of a state’s finances, repayment of debt, and a state’s ongoing creditworthiness,” the letter said. It was signed by Ellsworth along with Gov. Brad Little, Attorney General Lawrence Wasden, Controller Brandon Woolf, Idaho’s congressional delegation and legislative leadership.
Politicos spread ESG fears
Presenters at Tuesday’s Capitol roundtable included Vivek Ramaswamy, an entrepreneur, author and regular Fox News contributor, who said ESG factors are intentionally vague so large asset management firms can shape social and political agendas.
“I believe this is the single largest fiduciary breach of the 21st century,” Ramaswamy said.
Utah State Treasurer Marlo Oaks warned that a political agenda to eliminate “traditional energy” is guiding ESG. For example, an insurance company recently pulled coverage for cars owned by a Utah utility provider because they’re powered by fossil fuels, he said.
“Think about living an 1800s Amish lifestyle, that’s what we’re talking about,” Oaks said. “Do we have enough cotton and wool to replace the petroleum in our clothing? Have you ever worn wool underwear in the middle of July?”
Idaho industry leaders are looking to Republicans in Congress to oppose potentially costly ESG disclosure requirements at the federal level. But they said they’re more concerned about misconceptions about ESG circulating among Idaho lawmakers and what legislation might come out of them.
An unsuccessful resolution last session pulled language directly from Beck’s book, “The Great Reset: Joe Biden and the Rise of Twenty-First-Century Fascism.”
“ESG standards are designed to create a ‘great reset’ of capitalism and to revamp all aspects of our society and economy, from education to social contracts and working conditions,” the resolution said.
Other “wildly inaccurate” rumors, including that banks will block individuals’ debit cards at gas pumps, are floating around the Statehouse, Wright said.
“There seems to be a growing false narrative that ESG is being used by financial institutions to regulate individual consumers’ decisions and to control society,” he said. “What we want to preserve is, a financial industry is best when left alone.”
