Right-Wing Attacks on the Freedom to Invest Responsibly Falter in Legislatures

Frances Sawyer leads Pleiades Strategy and Connor Gibson is the founder of Grassrootbeer Investigations. This post is based on their report. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

Executive Summary

In 2023 Republican lawmakers in 37 states introduced 165 pieces of legislation to weaponize government funds, contracts, and pensions to prevent companies and investors from considering basic, common-sense risk factors. The legislation is framed around restricting the use of Environmental, Social, and Governance (ESG) investment criteria, such as the safety and treatment of employees, the diversity of management and workforce, and readiness to withstand the impacts of climate change. Were they to become law, the inevitable result of the bills would be to manipulate the market to favor select industries, particularly the volatile fossil fuel and firearms sectors.

This coordinated legislative effort, commonly referred to as the anti-ESG movement, generated massive backlash from the business community, labor leaders, retirees, and even Republican politicians. It is not an issue that resonates with the public. Despite all the hype, the vast majority of anti-ESG bills failed to progress through legislative chambers, including in ten states fully controlled by Republicans. At present, 22 laws and 6 resolutions in 16 states have made it through legislatures this year. Many of the finalized bills were heavily amended to reduce most of the substantive portions. Broad escape clauses were added to limit the most draconian prohibitions, which experts have warned legally contravene the basic tenets of fiduciary duty, creating a “liability trap.”

This report is the first comprehensive look at this legislative campaign and the broad effort to counter it. It follows the general arc of these 165 bills — where they came from, who sponsored them, who supported and opposed them, and how they fared.

As of June, 2023, our tracking has concluded that:

  • At least 165 distinct bills (including 9 resolutions) were introduced in 37 states.
  • 83 bills are dead, across 23 states:
    • In 17 states where legislation was introduced, no laws passed. 10 of these
      states are controlled by Republicans.
    • 3 bills were vetoed by the governor in Arizona.
  • 42 bills that did not pass will carry over into the 2024 legislative session.
  • 22 bills and 6 resolutions were approved by state governments:
    • 19 laws and 6 resolutions have passed in 14 states this year.
    • 3 enrolled bills await governor action in 3 states.
  • 12 active bills are pending. 6 have not had committee hearings.

In this report, we map the coordinated special interest groups that crafted model bills and lobbied for their introduction. We showcase the exceptionally diverse opposition to the bills, including the bankers, businesses, financial officers, labor advocates, and environmentalists who saw the campaign as an attack on the American economy itself. We also provide the first comprehensive analysis of the types of bills introduced, offering a taxonomy of bills, so that readers can understand the tactical options attempted by Republican legislators.

It is safe to assume that the interest groups behind this legislative push are revising their strategies by evaluating the success and failure of the bills so that new versions can be introduced across the country in 2024. To anticipate where this effort may go next, we find it critical to understand the network of actors behind this legislative push, the specific types of bills they proposed, and the ways they were received in the states.

Delaying Climate Accounting — and Action

The climate crisis presents material financial risks across sectors and is increasingly recognized by investors, executives, and regulators as a key threat to economic performance and stability. From floods and fires disrupting supply chains to high heat lowering workforce productivity to stranded asset risk as companies and governments alike set net zero emissions targets, climate risks are shaping economic fortunes today—and threatening long term market value.

Voluntary climate-related risk disclosure has brought significant transparency to these risks, enabling investors to make informed capital allocation decisions as they build a risk- adjusted portfolio that meets their clients’ needs. U.S. and European regulators are now proposing mandatory disclosures of these key climate risks, so that investors in public equities have equal access to robust, useful information on which to base their decisions.

As capital and regulators have become more climate-focused, fossil fuel companies recognize climate financial action as a potential threat to continued investment in their firms. The fossil fuel industry and their political allies claim there is “discrimination” against fossil fuel companies, yet to date the companies targeted as “boycotting” fossil fuels include some of the largest investors in fossil fuels worldwide. Bill language and testimony by anti-ESG proponents in several states suggests that these bills were written to prevent companies from taking climate risk seriously and to artificially boost continued investment in the fossil fuel sector.

The Opposition

Echoing a position taken by state banking associations across the country, Jay Kaprosy of the Arizona Bankers Association said in testimony on Arizona’s proposed SB 1138, “What you have in front of you is probably the most anti-free market bill that you’ll see this legislative session.” Because of the blatantly anti-free market nature of this legislative trend, business groups, chambers of commerce, and trade associations representing the financial sector led the charge against anti-ESG bills. Business lobbyists opposed anti-ESG legislation in at least 17 states: Arizona, Florida, Idaho, Indiana, Kansas, Maine, Missouri, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, South Carolina, South Dakota, Texas, Utah, and Wyoming.

“What you have in front of you is probably the most anti-free market bill that you’ll see this legislative session.” – Jay Kaprosky, Arizona Bankers Association

Damning cost estimates shared in testimony and legislative fiscal notes showed how the bills would drive up the costs of borrowing and decrease public pension returns. In multiple states, fiscal notes have shown the bills could cost state investments billions of dollars. In some instances, detailed below, such cost estimates were overlooked, obscured, or even ignored. Other studies found the bills restrict competition in the municipal bond market, costing taxpayers hundreds of millions of dollars. These costs, estimated and real, helped to coalesce a broad opposition early in the legislative cycle in states across the nation.

Advocates for pension beneficiaries and working families spoke out at length against the legislation in numerous states. From Florida to Ohio to Texas, labor unions fought to protect the financial security of public sector pension beneficiaries by ensuring their ability to invest with asset managers that charge lower fees and offer higher yield. They also reminded legislators of their members’ right to invest their own money in ways that would benefit–and not harm–themselves and their communities. Investor advocates saw the bills as restrictive of their values and strategies, while environmental advocates saw them as an indirect subsidization of dirty energy and an attempt to delay solutions to the climate crisis.

While lawmakers sometimes worked with corporate lobbyists behind the scenes to prevent the most dangerous bill provisions from becoming law, it is important to understand that even watered down bills will exact costs on the public. Weakened bills still pose threats to public revenue and pensions. In some states, bills restricting the activity of pension fund managers passed despite cost estimates in the millions of dollars, a direct threat to the hardworking public employees who rely on public pensions for their financial security.

Whether through losses to public investments, or the forced investment in industries that carry heightened financial risks, anti-ESG laws could lead to reduced prosperity for the residents of states subject to them.

Download the complete report here.

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