US swing states set to become ‘hot zones’ in ESG debate

In the debate over ESG in the US, the loudest policymaker voices have so far been from deep red and deep blue states – but, according to Nevada state treasurer Zach Conine, the next “hot zones” in the conflict could be swing states.

With a Democratic treasurer and a Republican controller, Nevada is a prime example of a “purple state”. Responsible Investor asked Conine what challenges this posed for state officials in dealing with ESG and the backlash against it.

“We certainly get letters and communications from constituents saying we shouldn’t invest in anything that might have a negative impact on the environment,” he says. “But we also get them from the other side, which seems to be arguing that we should only invest in things that seem to have a negative impact on the environment.”   

For Conine, the right path for the state is to make objective decisions based on mitigating risk.  

“Broadly our take is that an investor or a state should have as many options as possible when it comes to investment data and information,” he says. “And if that means that the state wants to consider ESG risk factors as they make their investment decisions, they should be able to do it.

“It also means that private businesses like the BlackRocks of the world should be free to do the same.”   

Conine is a member of For the Long Term, a non-profit network that aims to help public treasurers “leverage the power of their offices to deliver sustainable long-term growth”.

By contrast, Andy Matthews – who took over as Nevada controller in January – is a Republican and member of the State Financial Officers Foundation (SFOF), which has openly championed the anti-ESG narrative. 

The two have yet to discuss ESG, according to Conine. However, he is “sure” they will have a conversation about it in the future.

ESG battlegrounds

Nevada is not the only state with a mix of Republican and Democrat elected officials.

In neighbouring Arizona, Kimberly Yee boasts of being one of the first state treasurers to pull money from BlackRock. This month, however, local attorney general Kris Mayes announced an end to the state’s participation in investigations into ESG investment practices after defeating her Republican rival in a close-fought battle.  

Conine believes such states will be the next battleground for ESG. “Texas and California will continue to have their fights and they’re generally one-sided,” he says. “What we expect is to see is the Nevadas of the world become more of a hot zone for these types of conversations on ESG.”   

This makes them a natural focal point for officials from across the country looking to counter the anti-ESG movement, he adds. “We want to make sure they have as much information as possible, because like everything else the middle is where the fights are going to come down to and these states could go either way on the debate.” 

For treasurers in states where politicians are considering anti-ESG legislation, Conine says communication is key. “Talk to them, show them the math and the studies, and try not to make it a partisan thing,” he says.

“This isn’t an ‘invest in every fossil fuel company’ or ‘don’t invest in any fossil fuel company’ conversation. It should be ‘these are ESG risk factors that we want to take into consideration when we make an investment choice’.”  

He acknowledges that a bipartisan and fact-based approach could be a hard sell for politicians. “It’s easier to preach to the choir,”  he says. “But that won’t work from a long-term perspective.”   

Conine is also sceptical of the wisdom of passing anti-anti-ESG bills. “I think it’s just important to make sure people are as informed as possible.”   

Water focus

Sarah Bratton Hughes, head of sustainable investing at $187 billion fund house American Century Investments, believes the appeal of the anti-ESG movement in individual states will likely depend on their economic mix.  

“We’ve got a lot of attention on the E, which is energy and the boycotting of fossil fuels,” she said.

Texas, Kentucky and West Virginia, the only states so far to release lists of designated fossil fuel boycotters, all have large energy sectors, with Kentucky and West Virginia in particular heavily reliant on coal for electricity generation. In the case of Nevada, Bratton Hughes says water could become a key ESG issue.   

So will the anti-ESG movement spread to swing states? “I really want to say no,” she says. “It potentially will, but you can’t just make a blanket statement. You would have to look state by state. It’s comparable to how Americans look at Europe. Northern Europe is different from central Europe or southern Europe when they think about sustainability.”   

Caucus conundrum 

While swing states may soon become battlegrounds in the fight against ESG, the spirit of bipartisanship is still just about alive in Washington, DC.

At the end of January, Congressmen Juan Vargas and Sean Casten announced the launch of the Sustainable Investment Caucus in a bid to help members of Congress better understand the sustainable investment landscape.  

The group only consisted of seven Democrats at launch, but US SIF managing director Bryan McGannon says it is reaching out to Republican colleagues. 

“We can’t force them to join, but efforts are being made to identify Republicans who want to strip away the theatrics of the current debate around ESG in the US and have a deeper discussion on the merits,” he says. 

“The reality is that members of Congress and their staffs have a huge list of policies before them. It is a challenge for them to be up to speed on a lot of things. So I think the caucus is necessary to provide them with this background, this fact-based information about the field, to give them a firm footing on sustainable investments,” he adds. 

McGannon also notes that cracks are beginning to show in the anti-ESG movement.  

“It largely is a political movement instead of having a strong intellectual structure to it,” he says. “I’m not so sure that this will be this great issue that Republicans will want to use as an election tool or will kind of catch fire.

“But certainly, if the Republican party takes over both ends of Pennsylvania Avenue [Congress and the White House] there will be a lot of work to do to ensure that they don’t roll back sensible policies.” 

As McGannon notes, Republican state officials are also running out of anti-ESG firepower. “The leverage they had was using their pension funds to make high-profile moves away from firms that are doing sustainable investing,” he says. “But they don’t have any more funds to move. They don’t have any more ammo in their stock so I don’t know what their next step could be.” 

American Century’s Bratton Hughes also believes that the appetite for sustainable investing will grow as ordinary people begin to feel the heat from climate change. 

“What is creating a lot of the backlash here is that it’s turning into a Wall Street versus ‘Main Street’ narrative,” she says. “What’s interesting about that is that you’re seeing Main Street start to really feel the impacts of the fiscal risks of climate change – although how that will work from a political perspective I’m not sure.” 

She notes that on the same day the Federal Reserve announced it would require climate risk analysis from big banks, the cover of the New York Post featured an article about how people living in certain parishes in Louisiana can no longer get insurance. “That’s Main Street,” says Bratton Hughes.