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How states can seize the ESG high ground

If conservative states proclaim themselves anti-ESG, then logically there must be a pro-ESG alternative.

Flower made of money

Republicans wrongly frame ESG as prioritizing political or ideological objectives, but ESG is clearly a risk mitigating tool. Image via AnnaNel/Shutterstock.

[GreenBiz publishes a range of perspectives on the transition to a clean economy. The views expressed in this article do not necessarily reflect the position of GreenBiz.]

From election results to climate change, the GOP’s dangerous denialism of logic and data presents an opportunity for Democrats to win votes and business.

We saw this play out in the 2022 midterm elections when four states flipped their governorship or legislatures blue, bringing the total number of Democratic Trifectas to 17. In Michigan, Democrats gained control for the first time in more than a generation. Although many factors contributed to the swing, extremist GOP stances that go against reasonable people’s beliefs — including access to abortion and denying the 2020 election results — certainly boosted the blue wave. These 17 blue states should continue countering the worst of the GOP’s extreme ideas.

It may sound niche at first, but nothing makes more sense than addressing ESG (Environmental, Social and Governance) investment. ESG’s goal is to highlight projects and companies with a positive climate or social impact, which helps attract investors. Conservative-led states are defying reason by making ESG investment harder or even illegal. Their loss means that blue states can steal their share of the pie.

What’s at stake

ESG funds have burgeoned to meet ballooning demand, expected to hit $55 trillion by the end of 2022. This incredible growth marks a rational, economic response to the increasing number of investors and customers seeking to support environmentally and socially responsible companies. Put simply, an enormous stack of money awaits on the table.

Leave it to right-wing states to fight the greening of the economy by pushing an irrational, extreme agenda — not only sacrificing citizen’s health and wellbeing, but making purely illogical economic decisions. In fact, one study shows that anti-ESG policies will cost taxpayers hundreds of millions of dollars by interfering with the free market and limiting competition. For example, because many banks are being banned from working in Texas, the pool of competition has shrunk and that has driven up transaction costs, a tangible cost impact of the anti-ESG laws.

Pro-ESG policies will signal that Democrats intend to lead the country into the greening future.

Texas passed laws banning local governments from working with any banks supporting pro-ESG policies — and its list of banned banks keeps on growing. Florida’s ban of ESG mandates in the state’s pensions prevents a state ravaged by hurricanes from taking a stance on climate mitigation. Now Gov. Ron DeSantis wants to make it illegal to sell ESG bonds at all — even though investors want to buy them. And 19 GOP attorneys general far exceeded their scope and wasted taxpayer money and time writing a deluded letter to BlackRock ironically accusing it of misusing public money.

Republicans wrongly frame ESG as prioritizing political or ideological objectives; however, ESG is clearly a risk-mitigating tool that considers the financial costs of environmental damage and social upheaval.

How to be pro-ESG

Blue states can take charge as centers of excellence on climate through policy solutions that attract ESG investment and ESG-minded businesses. State leaders want to improve the business climate, and that would only be bolstered by integrating the environmental and social climate. With the political will already in place, the following three proposals would be a great start:

1. Adopt ESG mandates in investment policy: ESG generates higher returns than non-ESG portfolios, on average. Despite this, Florida and other Republican-led states want to ban ESG from their pensions and public investments. "Pro-ESG" states should take the opposite approach by adopting ESG mandates, while also making it easier for local governments to do the same. Doing so empowers public pensions to both create positive environmental and social impacts, and deliver better profits on behalf of pensioners.

2. Design a strategy to leverage ESG finance for public resilience projects: Democratic governors should form state ESG Task Forces similar to California’s Green Bond Committee, with the mission to maximize investments in climate resilience, renewable energy, clean water and EV infrastructure. A potential outcome might be state ESG bond funds that raise capital from investors as one consolidated, large-scale syndicate. Local governments would borrow from the fund, thereby lowering their own interest rate and issuance costs.

3. Create an ESG friendly business climate: McKinsey research found, "Of more than 2,000 academic studies […] around 70 percent found a positive correlation between ESG scores and financial returns." States should enact policies that attract pro-ESG businesses — and their high performance. They could add an ESG criteria to economic incentive programs or focus site readiness initiatives on green projects. While Texas wants to ban banks with ESG products (essentially all banks), pro-ESG states could ban banks without them — building a highly profitable finance sector that is still focused on solving some of our biggest issues.

Such policies will signal that Democrats intend to lead the country into the greening future. Extreme weather events are increasing, and places such as Florida and Texas are already suffering the damage. Investing in our continued resilience while attracting ESG-conscious talent and business will empower us to not merely survive but thrive.

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