Anti-ESG Fever Shows Signs of Bending, Not Breaking (Yet)

Support for socially responsible investment strategies and business practices continues to run high among the general public. Yet environmental, social and governance (ESG) principles remain a political football in the United States. The anti-ESG movement is still running strong, but some state legislators already have second thoughts as the consequences of anti-ESG laws come into view.

Public sentiment vs. political motivation

In a 2023 survey, 77 percent of respondents across 12 countries agreed it is "important for companies to take action on ESG issues," and 71 percent said companies should "speak out on issues that are important to their employees and customers." When presenting the findings, researchers with the strategic communications firm SEC Newgate offered this takeaway for global firms: “Take action on ESG and tell people about it, or risk losing customers.”

Forbes noted similar trends in its second annual Best Brands for Social Impact list released in partnership with the consumer research firm HundredX in April. “Last year, 22 percent of respondents offered strong positive or negative feelings about brands' social impact," Forbes observed. "This year that figure jumped to 27 percent." 

This statistically significant increase supports brands that center their corporate identity on the four ratings included in the list: overall brand values and trust, social stances, sustainability, and community support. The 2024 results indicate “consumers might actually be considering companies' efforts more than they have in the past,” Forbes found.

That forceful statement by Forbes contrasts with the partisan political environment against ESG principles. According to the advisory firm Pleiades Strategy, 318 pieces of legislation were introduced in 38 U.S. states between 2021 and 2023 with the aim of preventing companies and investors from taking the climate crisis and other widely recognized ESG risk factors into consideration.

In one sign that the anti-ESG movement is not particularly popular beyond the statehouse door, many of these bills failed to move off the floor. As of April, only 37 bills in 17 states are now law, according to Pleiades' tracking. Of those that did pass, the original scopes were often narrowed in response to opposition and the risk of skyrocketing costs for borrowing. Pleiades lists business, labor, financial officers, and environmental advocates among those actively working to limit the damage.

Less competition spells trouble for municipal bonds

Concerns over the negative consequences of anti-ESG legislation center on the economic impacts that come with driving competition out of state financial markets. By nature, restricting which financial firms can do business with state and local entities means fewer firms to choose from, which can lead to higher costs and lower returns.

Those concerns were quickly realized in Texas, which adopted anti-ESG legislation in 2021. The law soon became notorious for costing the small Texas city of Anna (population 23,558) more than $277,000 on its bond sale as interest in the sale dried up. 

Beyond the damage to a small municipality’s finances, the added expense can have a ripple effect on a local government’s ability to finance projects that build more efficiency, resiliency and long-term savings into their community.

Those concerns have already surfaced in the small city of Stillwater, Oklahoma (population 49,160). Last spring, the city was on track to receive a low-interest loan of $13.5 million from Bank of America when it was tripped up by the state’s new Energy Discrimination Elimination Act, S&P Global reports.

The loan was intended to pay for new energy-efficient lighting and upgrade two outdated heating and cooling systems in municipal buildings, resulting in an energy savings that would pay off the loan in 15 years. “That plan was halted when Oklahoma Treasurer Todd Russ in May published an initial list of 13 financial institutions, including Bank of America, barred from doing business in the state,” S&P reporter Karin Rives observed.

Anti-ESG laws negatively impact rural communities, study finds

The Oklahoma anti-ESG law does provide some room for waiver in case of financial harm. However, amendments advancing in the current legislative session could burden financial officers with additional requirements.

The business organization Oklahoma Rural Association is among those pushing back on the new amendments. It underscored the actual and potential economic harm that anti-ESG legislation poses to small cities and rural communities in a widely reported study released last week.

The study, conducted by the University of Central Oklahoma, compares borrowing costs in the Sooner State with communities in neighboring states that did not pass anti-ESG legislation.

The findings? Borrowing costs for municipalities in Oklahoma increased by 15.7 percent relative to similar out-of-state communities after the Energy Discrimination Elimination Act passed in 2022. Almost $184 million in additional expenses have already been “locked away” as a result of the legislation, according to the analysis. That works out to almost $11 million for every month the law has been in effect.

“This is due strictly to increased borrowing costs and elevated coupon rates,” wrote Travis Roach, author of the study and chair of the university's department of economics. “Municipalities in Oklahoma now face an additional cost that is a direct result of the [Energy Discrimination Elimination Act] policy and not due to underlying interest rate fundamentals.”

In some cases, this caused delays and outright abandonment of projects intended to benefit smaller communities with infrastructure upgrades and other quality-of-life improvements, such as the energy-efficiency upgrade planned for Stillwater.

“These foregone projects would benefit the community but now they cannot, and these foregone and delayed projects harm the economic opportunities for those who would have been hired to complete the projects,” Roach concluded.

Next steps for ESG investing

As demonstrated in Oklahoma and elsewhere, some legislators who vociferously support anti-ESG legislation have later tempered their stand as these bills move through the legislative process. Some continue feeding rhetorical red meat to their voting base while adjusting their legislative strategy to avoid making taxpayers foot the bill.

That’s a delicate needle to thread, but it also provides an opportunity for financial institutions to adjust. Some have worked around inflammatory rhetoric by reducing or eliminating the use of the acronym “ESG” in corporate and public communications, while continuing to pursue ESG goals.

Nicolai Tangen, CEO of Norges Bank Investment Management, has also spotted an opportunity in the anti-ESG movement. “We think the fact that some other people are pulling away gives us a better opportunity to kind of phase in,” he told CNBC last week, indicating that firms like his are ready to step in when others drop the ESG ball. Norges manages the Norwegian Government Pension Fund Global, one of the largest investors in the world. 

Tangen also refocused the conversation on the common-sense foundations of ESG investing, particularly as it relates to environmental sustainability. “We think it is part of long-term investing," he said. "You really need to care [about] the impact that companies have on the environment, otherwise you’re not going to make good long-term investing."

Despite the legislative activity against ESG investing, the overall momentum is building in support of business and investment strategies that emphasize long-term thinking and sustainability over short-term profits.

Another wave of anti-ESG legislation is already underway. But 2024 polling from Morgan Stanley points to a widening gulf between public sentiment and partisan lawmaking: More than 70 percent of individual investors said they believe “strong ESG practices can lead to higher returns,” and more than half plan to increase their sustainable investment portfolios.