This article is sponsored by Corporate Citizen Project.
In the latest salvo against asset management firms, rating agencies, and proxy advisory companies, Missouri’s Attorney General Eric Schmitt has begun an investigation into Morningstar and its Sustainalytics subsidiary. Schmitt is seeking to discover whether the company has run afoul of a state consumer protection law with its evaluations of environmental, social, and governance issues.
More than 30 states have similar laws, and more than a dozen are pushing back on what Schmitt called “woke ESG investing.” The investigation will also look at evaluation practices for companies believed to be supporting boycotts, divestment, or sanctions against Israel.
Last week, West Virginia State Treasurer Riley Moore barred four major banks, including Goldman Sachs, JPMorgan, Wells Fargo, and Morgan Stanley, along with asset management giant BlackRock, from entering into banking contracts with the state. The New York Times reported that West Virginia, Louisiana, and Arkansas have withdrawn more than $700 million from BlackRock because the firm is “too focused on environmental issues.”
Recent efforts have also focused specifically on proxy advisors, who corporate governance think-tank The Corporate Citizenship Project cites as one of the prime culprits of ESG mandates due to their influence on large asset managers. In Nebraska, legislators recently demanded the Nebraska State Investment Council divest from Genstar Capital, the parent company of Institutional Shareholder Services, over concerns that ISS’s ESG policies are harming the state’s beef industry.
The Texas Energy Alliance has pushed Texas Comptroller Glenn Hegar to divest state funds from Genstar Capital over ISS’s anti-oil and gas policies, a move consistent with a recent law prohibiting government funds from being used on activities harmful to oil and gas jobs.
The dispute between other states and ESG investing runs along the same lines. On one side, the states want the jobs, economic activity, and tax money that fossil fuels have provided for decades. On the other side, investors hold that ESG investing makes financial sense because fossil fuels are subverting efforts to combat climate change that will ultimately cost taxpayers billions or trillions in recovery and rebuilding costs.
In a recent paper on the financial costs of anti-ESG policies, Daniel Garrett of Penn’s Wharton School and Federal Reserve Governor Ivan Ivanov conducted a study of the Texas law enacted last year prohibiting any Texas municipality from contracting with a bank that restricts funding to oil and gas companies. The research found that municipalities that had previously used financial institutions as bond underwriters ended up paying higher borrowing costs. Garrett and Ivanov estimate that “Texas entities will pay an additional $303–$532 million in interest” on the $32 billion borrowed during the eight months of the study.
The agencies that create or promote ESG ratings have done little to protect themselves from the slings and arrows of state laws like those passed in Texas and elsewhere. While the costs have been modest so far, consider the effect on BlackRock and other financial institutions if (when) states and municipalities begin withdrawing nearly $6 trillion in defined benefit pension funds. ESG ratings and proxy voting recommendations based on those ratings will either have to be made more transparent, or they will be ignored for six trillion reasons.
According to The Corporate Citizenship Project’s Chief Analyst Bryan Junus, the anti-ESG efforts of state leaders illustrate that ESG activists must be more transparent and accountable with their standards.
“Going after Oil and Gas in Texas, cattle in Nebraska, and coal in West Virginia is not good politics. It is therefore unsurprising that state leaders have organized against these efforts. It does not help the cause of ESG when leading proponents like ISS are found to lack executive diversity themselves, lack transparent rating methodology, and be burdened by extreme conflicts of interest. Those who support the cause of ESG need to take these political moves as a wake-up call.”
This article is sponsored content and originally appeared at Corporate Citizen Project.