Asset managers in the US are facing increasing regulatory scrutiny over their ESG and fossil fuel divestment activities, with Republican legislators and attorney generals in four US states introducing legislation to ban ESG or launching inquiries into ESG activities.
On Wednesday, Texas comptroller Glenn Hegar wrote to 20 large asset managers seeking clarification on whether they “boycott” energy firms. Under Texas law, governmental entities are prohibited from investing in companies which refuse to deal with or “otherwise take any action that is intended to penalise, inflict economic harm on, or limit commercial relations” with fossil fuel firms. BlackRock, one of the managers on the list, has twice downplayed its climate credentials in letters to Texan officials.
Other investors include Abrdn, BNP Paribas, Credit Suisse, Danske Bank, HSBC, Invesco, JPMorgan, Jupiter Fund Management, Man Group, NatWest, Nordea Bank, Rathbones, Schroders, Sumitomo Mitsui, Svenska Handelsbanken, Swedbank, UBS and Wells Fargo.
Also this week, the Idaho House of Representatives passed a motion claiming that the use of ESG standards and scores poses a threat to individual freedoms and the US constitution, and threatens to “usurp the legislative process”. The motion mandates the legislature’s Committee on Federalism to draft legislation that “protects the state of Idaho and its citizens” from ESG standards. It is not clear what this would entail, or which ESG standards are being targeted, but the committee will make its recommendations in November.
A recent attempt in Wyoming to introduce a bill banning financial institutions from using “environmental, social justice or governmental score[s] or metric[s]” to determine investments failed to get past the committee stage, but a number of other states including West Virginia and Kansas have introduced similar legislation.
West Virginia’s Board of Treasury Investments recently pulled its investments from BlackRock over its efforts to push companies to adopt net zero targets, and increased investment in China.
Efforts to limit ESG investment and stewardship are not limited to ‘deep red’ states. The attorney general of Arizona, a state which narrowly voted for Joe Biden in 2020 and has a Democrat governor, said at the start of March that he had opened an investigation into shareholder engagement network Climate Action 100+, looking at “potentially unlawful market manipulation”. Mark Brnovich warned that ESG “may be an antitrust violation” and called CA100+’s actions “a coordinated conspiracy”. There are strict rules in the US about ‘acting in concert’ – where two or more shareholders coordinate their influence over a company in a way that could produce unfair or inappropriate outcomes. CA100+ had not responded to a request for comment at the time of publication, but its website includes a disclaimer that it “does not require or seek collective decision-making or action with respect to acquiring, holding, disposing and/or voting of securities” and has previously insisted that it acts within the current rules.
Not all the legislative efforts have been to stifle climate finance or ESG, however. A number of Democrat states have passed legislation calling on their state pension funds to divest from fossil fuels; and California’s two pension giants, CalPERS and CalSTRS, are facing a bill which would force them to ditch their fossil fuel holdings.
The growing patchwork of pro- and anti-sustainable finance rules across the US could throw up complications for asset managers with investors and relationships across the country. Climate-sceptical think tank the Heartland Institute, which pushes for anti-ESG bills to be introduced and has testified before a number of legislative committees about ESG, has identified proposed or passed bills in 24 US states.