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The latest climate fight is in finance

Republicans’ newest tactic to protect carbon-intensive industry is anti-ESG regulation; green-minded investors need to pay attention.

[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.]

On the historical journey toward solving humanity’s destruction of the environment, financiers lagged at the end. Scientists sounded alarms, activists shouted warnings, politicians stumbled to ideas and businesses announced greener goods and services. A global vision came into focus — a planet fueled by renewable power, cleared of carbon and pollution, made possible by massive investment in brand new energy-efficient infrastructure, transportation and buildings. 

But how to finance the priciest wish list in world history? The modern, profit-driven strategy of investing did not rise to the occasion. Wall Street ran the numbers through its models and calculated an ROI too low to invest. Enormous upfront costs could not be paid off by meek future profits. Carbon intensive industries simply paid better. 

Then, Wall Street — perhaps begrudgingly, definitely slowly — changed. More investors wanted to allocate capital to green projects such as renewable energy, and to socially responsible companies. Over the years, demand for environmental, social and governance (ESG) investing has exploded in the markets and is projected to reach $55 trillion by the end of 2022. 

That’s the good news. 

The bad news is that some Republicans want to reverse course. This year, Texas imposed anti-ESG legislation that costs taxpayers hundreds of millions of dollars. Florida banned ESG from pensions. And 19 attorneys general sent a deluded letter to BlackRock accusing it of misusing public money. 

What has triggered such fervent attacks on the ESG market? Critics focus on two flimsy arguments: ESG investments have lower returns; and ESG- focused investment managers breach their fiduciary duty. Let’s debunk each of these.

First, many studies show ESG investments having higher than average returns. Of course, market returns and trends change daily. In 2022, oil certainly performed well with rising gas prices, whereas renewable energy posted higher returns early in the COVID-19 pandemic when oil plummeted. 

Republicans claiming ESG investing has lower returns fail to mention that markets fluctuate wildly. Many have cited a study that found a 1.13 percent lower return from ESG funds. But, the study’s point was actually to show how ESG funds do not necessarily invest in greener or more socially responsible companies due to the inadequacy of ESG disclosures and information. The study’s critique was with how funds select investments, not the 1.13 percent difference in returns which could easily change in future market conditions.     

Second, "fiduciary duty” does not mean maximizing returns. It means to advise clients based on their own investment goals and not to misrepresent the facts. This often results in an investment strategy that in fact does not maximize returns. For example, a retiree who has saved their whole life and now wants to relaxingly enjoy steady passive income should be advised to invest in bonds, which have a lower return than stocks but are less risky.  

The slew of attacks from climate-denying Republicans on the use of ESG in investment decision-making is nothing but a pathetic Hail Mary to protect big oil and slow the greening of America.

Anyone who wishes to put their dollars towards ESG must be treated the same. In theory, this could result in investments with lower returns; in practice, an ESG portfolio can outperform the market. Furthermore, many people have goals beyond achieving maximum returns: helping the planet.

So the attorneys general arguing that BlackRock cannot invest pensions in ESG are wrong. The State Pensions investing with BlackRock have placed their money with it by choice, not by force. If pensions disagree with BlackRock’s investment strategy, then they can choose a different fund. That is, after all, the definition of the free market — a principle allegedly at the foundation of conservative ideology.

The slew of attacks from climate-denying Republicans on the use of ESG in investment decision-making is nothing but a pathetic Hail Mary to protect fossil fuel concerns and slow the greening of America. 

Let’s be clear, ESG investing is not the panacea to the climate crisis. But it attracts and funnels a lot of capital into environmentally friendly projects and companies. This noticeable improvement makes green investments just marginally more attractive, but, when it comes to the earth’s future hinging on a couple degrees, margins matter. 

The GOP’s argument about fiduciary duty or lower returns is not supported by logic or economics. So where does the antagonistic passion to obstruct ESG investing come from?

The obvious reason is simply that Republicans have long fought anything climate friendly — a vindictive attitude driven by a refusal to accept that climate change is both real and anthropogenic. Or, perhaps, the GOP actually believes green energy’s greatest sin is that it has not made enough money to match the political donations of the fossil fuel and extractive industries. In the end, Republicans will fervently stand for their key lobbyists at whatever cost.

Thankfully, their anti-ESG arguments do not tread water. But investors need to counter them and make sure regulators protect ESG. It has taken the world too long to come this far on green financing; we cannot simply allow the GOP to drag us backward.

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