Elections, engagement and anti-ESG: What does 2024 have in store for the US?

The backlash hangs over the ESG market in a crucial election year, but disclosure rules, engagement and ESG bonds forge ahead nonetheless.

Any sustainable finance outlook for the US, and indeed any look back over the past year, is necessarily coloured by the anti-ESG backlash, which has sent many firms scurrying for cover and seen waves of both investigation and legislation.

That said, it is not getting in the way of increasing regulatory and investor action on climate, and there is a growing counter-movement.

The biggest event in the first half of 2024 will be the release of the final SEC climate disclosures rule, which the regulator said this month would be out by April.

Opposition to the rule has been particularly intense around Scope 3 disclosures – and it remains unclear in what form, if at all, Scope 3 will end up in the final version.

California passed laws this year requiring large firms operating in the state to disclose their emissions, and a similar law is on the books in New York, while thousands of multinational firms will be subject to the EU’s Corporate Sustainability Reporting Directive (CSRD).

The number of companies that will be out of scope of one of these three laws and in scope of the SEC rule is likely to be small, so potential watering down of the SEC rule might not have an outsize effect.

Lance Dial, a partner at law firm K&L Gates, says the release of the SEC rule will be “seismic”.

Unsurprisingly, there has been significant opposition from both conservative politicians and some companies. Even Tom Quaadman of the US Chamber of Commerce joked about suing the SEC in a fireside chat with chair Gary Gensler.

Dial believes litigation against the final climate rule has already been prepared and is just waiting for its release in order to be filed.

Bryan McGannon, managing director at US SIF, agrees that the SEC climate rule will be immensely significant and also that it is a “foregone conclusion” that somebody will file a lawsuit – although he notes that, in the current political climate, lawsuits tend to get filed against any SEC rule that has a substantial impact.

Outside the courts, McGannon expects members of Congress to use the Congressional Review Act to try and overturn the SEC rule within two months of passage.

Such a vote is likely to pass the Republican-controlled House and there are enough Democrats facing tough re-elections in red states for it to pass the Senate, McGannon adds, but it would be vetoed by President Biden.

Turning to the SEC’s other functions, German manager DWS settled with the regulator for $19 million in September over greenwashing claims in what was the largest ESG-related fine paid by an asset manager to date.

However, there was some head-scratching earlier this year when ESG did not feature in the SEC Examination and Enforcement Division’s 2024 examination priorities.

Dial says he “can’t quite explain” why this was dropped, but that it may just be that ESG is an everyday topic for the regulator rather than an emerging special issue. In any case, the SEC has still been taking a tough stance on the examination process for ESG products.

Political wrangling

Looking ahead to the second half of 2024, the country-sized question mark hanging over markets is the presidential election, which will take place alongside a swathe of congressional and state elections.

Donald Trump, currently the most likely Republican candidate, has rarely referenced ESG this year, unlike rivals Ron DeSantis and Vivek Ramaswamy – and even they have deemphasised the topic in recent rhetoric and debates.

At the same time, the Financial Times reported last month that senior members of Trump’s campaign team are working on plans to gut the Inflation Reduction Act and roll back regulation in areas such as electric vehicles.

While the importance of the presidential race should not be underestimated, much of the impetus against ESG has come at the state level and in Congress. Control over these seats provides an important opportunity to attack – or protect – sustainable finance.

Republican control of the House of Representatives and its committees has given them a high-profile avenue to undermine sustainable investments, inviting sympathetic witnesses to a series of committee hearings.

Dial and McGannon differ in their predictions on the state level. While Dial anticipates more proposed legislation on both sides, with a rise in Blue state laws mandating divestments, McGannon expects there to be less activity than 2023.

He notes that, while state Republicans who have failed to pass laws may try again, the number of states without legislation already in place is small. Some states may also be reluctant to move forward after seeing the costs imposed on state pension funds under anti-boycott laws.

Legal lookout

Both sides of the ESG debate are increasingly turning to the courts. Aside from expected litigation around the SEC, there are a number of ongoing lawsuits.

“Looking forward, we’re going to see more ESG battles get into courts, both on the anti-ESG and anti-anti-ESG side,” says Dial. “2024 will be a year where, no pun intended, the temperature rises with respect to this stuff.”

Legal action against the Department of Labour’s rules on allowing US workplace pension schemes to consider ESG factors when selecting investments is being taken to appeal after unexpectedly losing in a Texas court, and industry group SIFMA is suing Missouri over its anti-ESG rule.

“We’re going to see more ESG battles get into courts, both on the anti-ESG and anti-anti-ESG side”

Lance Dial
K&L Gates

The state of Oklahoma is being taken to court by a beneficiary of its pension system who claims its anti-boycott bill is unconstitutional, while state treasurer Tod Russ has got into a spat with the Oklahoma Public Employees Retirement System after the fund tried to use a fiduciary exemption to avoid complying with the law.

There is also uncertainty over a series of investigations being carried out by state attorneys general. Enquiries by this group resulted in the collapse of the Net-Zero Insurance Alliance this year, and further attempts in this area are expected in 2024, although observers are sceptical about the merit of any legal action.

Progress nonetheless

While the anti-ESG movement has made significant headway, ESG advocates are still forging ahead.

On the west coast, CalPERS announced an ambition to double its climate solutions investments. In the east, New York City’s pension systems have been busily engaging on labour rights, with the City Employees’ and Teachers’ retirement systems signing up to the Global Labour Rights Investor Network at the end of November.

Marian MacIndoe, head of ESG stewardship at Parnassus Investments, expects social issues to come into increasing focus, especially in proxy season. She is already seeing some living-wage proposals.

On the flip side, there is some reluctance by companies to opine on thorny social issues such as reproductive rights, as well as the looming question of how the impact of global conflicts will materialise for US firms.

MacIndoe also predicts an increasing focus on AI. “It is going to bring so much innovation and hopefully change the world for the better, for workers and others, and deliver returns for investors like us.

“But we want to make sure that the companies we’re invested in are thinking about the ethics of it – safety, transparency, accountability, accuracy – and resultant regulation and litigation so that they’re not retooling down the road.”

Parnassus is already carrying out some engagements on responsible AI, she adds.

Bond blues

Turning to the bond market, this year has seen a particularly marked slump in ESG-labelled issuance in the US. However, Amy Hauter, director of sustainable fixed income at Brown Advisory, says this is probably due more to the high rates environment than the polarisation of ESG.

She adds that an upsurge in green bond issuance is possible in the first half of 2024, as companies take advantage of green policies whose future may be uncertain post-election.

The increasing focus on the transition may also spur growth in green bonds from more unconventional issuers to fund activities such as mining transition metals or methane reduction.

The municipal bond market has been something of a mixed bag this year, with the rates environment depressing issuance. Hauter notes that state-level laws banning municipalities from issuing ESG-labelled debt may spread from Florida to other deep red states.

At the same time, she says that standards in a market segment that has previously been called “the Wild West of labelling” are starting to improve.