On 15 December, executives at BlackRock and State Street, two of the three largest asset managers in the world, appeared before a Texas state senate committee to testify on how environmental, social, and governance (ESG) investing will affect state pensions. ESG investing seeks to quantify how social and environmental impacts relate to a company’s business model. ESG funds screen out stocks considered either environmentally or socially harmful, which could range from fossil fuel companies to those which do not implement gender diversity quotas. 

One party was missing from the Texas committee hearing. The world’s second-largest asset manager, Vanguard, which together with BlackRock and State Street make up the ‘big three’ of investing, was no longer required to attend thanks to its recent exit from the Net Zero Asset Managers (NZAM) initiative, which falls under the wider Glasgow Financial Alliance for Net Zero (GFANZ), and under which Vanguard had committed to reaching net-zero emissions across its portfolio by 2050. 

It has been widely speculated that Vanguard’s decision to leave NZAM was due to political pressure in the US, where over the past few months conservative lawmakers have responded to the growing appetite for ESG investing by introducing new legislation at the state level seeking to counter its impact. 

Generally, these ‘anti-ESG’ laws can be classed as either anti-boycott bills (of energy or firearms), or bills targeting ESG investing or ESG sustainability ratings. As an October analysis from Capital Monitor reveals, these bills are largely concentrated in Republican states

Despite being the among the world’s largest investors in fossil fuels, BlackRock has become the main target for Republican attacks on ESG investing due its broad offerings of ESG funds. 

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By GlobalData

As a result, in recent months a handful of states including Arizona, Arkansas, Florida, Louisiana, Missouri, South Carolina and Utah have divested state assets from BlackRock’s funds, notably including a $2bn divestment from the state of Florida earlier this month, meaning as of December 2022, these total divestments amounted to around $4bn. 

However, while Republicans have been whipped up into a frenzy, bringing the culture war to investing, the anti-ESG movement’s impact on the energy transition is less clear-cut. 

Divestment in numbers 

For starters, compared with BlackRock’s total wealth under management of almost $8trn, the $4bn so-far divested from Republican states is a drop in the ocean. 

“To a normal company that [amount of money] would hurt… but I don’t think Larry Fink [BlackRock’s CEO] is going to lose any sleep over it,” says Tim Buckley, director of the think tank Climate Energy Finance. 

More pressing for BlackRock and other major investors are the litany of legal threats Republicans have levelled at them in recent months via a series of open letters. 

This includes one letter penned by 19 Republican state attorneys general in August this year addressed to Larry Fink, which claims that in sanctioning fossil fuels in certain funds, BlackRock is breaching its fiduciary duties – investors’ legal duty to generate the best returns for their clients – using the “hard-earned money of our states’ citizens to circumvent the best possible return on investment” and “force the phase-out of fossil fuels”. 

One month earlier, US Senator Tom Cotton of Arkansas wrote a separate letter to BlackRock, claiming its policies to restrict fossil fuel financing and its membership of investor initiative the Climate Action 100+ amount to a “violation of antitrust laws”. Also known as competition laws, antitrust legislation is designed to ensure that institutions are not able to make decisions behind closed doors that could distort market competition. 

To date, there is no record of anyone successfully suing investors for their climate actions on antitrust grounds. Yet the threat of antitrust allegations meant that earlier this year, the Race to Zero campaign, which provides accreditation to GFANZ, watered down its wording around members' coal commitments to make it "ironclad against threats", in the words of Thomas Hale, co-chair of Race to Zero’s independent Expert Peer Review Group.

As such, Vanguard does not appear to have acted out of fear from any tangible threat of breaching competition law when it left NZAM, despite citing the desire to “speak independently on matters of importance” in its statement on leaving. 

With no real threat of divestment and no real threat of litigation, Vanguard has been accused of being “cowardly” for exiting NZAM. 

“Clearly, political pressure and [a] media spotlight on [Vanguard] seems to have been something that has scared them off from keeping their relatively tepid membership in the Net Zero Asset Managers initiative,” says Ben Cushing, campaign manager at non-profit Sierra Club, who refers to the anti-ESG movement as “political theatre”. 

The movement is predicated on a number of apparent contradictions and ironies, including the fact that BlackRock is at once being bashed by climate activists for inaction on climate change while also being attacked by Republican politicians for being “too woke” in limiting brown investments. One irony that has emerged from the ESG backlash is that while BlackRock has spent years persuading consumers of its climate ambition, in order to defend itself against Republicans’ attacks it was forced to concede it still has billions of dollars invested in fossil fuel assets. 

Another potential contradiction that has emerged from the Republicans’ war on ESG investing is that the supposed free marketeers have been using boycotting as a means of countering what they perceive as another boycott. As Cushing puts it, these Republicans “don’t like it when the free market moves against them”. 

What is driving the anti-ESG movement 

According to Thomas O’Neill, founder and director of think tank Universal Owner, there are two key elements behind the anti-ESG movement's motivation for these attacks – the first political, the second financial. 

On the political front, O’Neill points to polling from as long ago as three years, which shows that a majority of Republican voters actually support the government taking more action on climate change. O’Neill’s theory is that presenting climate denialism as a counter to ‘woke capitalism’, which encompasses a number of liberal issues that tend to poll unfavourably with Republican voters, such as gun control or trans rights, is a means by which they can mask their vested interests in preserving the fossil fuel industry. 

Cushing echoes this sentiment, arguing that while climate denial is “no longer as much of a politically palatable message as it was a few years ago”, Republicans have “moved on to decrying ESG as a way of talking about their climate denial and expressing their interest in protecting the fossil fuel industry at all costs”. 

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The financial ties between the anti-ESG movement's Republicans and the fossil fuel industry are only starting to be investigated, with the New York Times publishing a handful of investigations on this issue since the summer.

For example, in August 2022, the paper revealed extensive lobbying of Republican state treasurers that have boycotted major investors due to their ESG efforts. It shows how the State Financial Officers Foundation, which worked alongside the American Petroleum Institute and other conservative groups with ties to the fossil fuel industry, extensively lobbied state treasurers including Riley Moore, the Republican treasurer of West Virginia, who was behind the boycott of banks including Goldman Sachs, JPMorgan and Wells Fargo. 

Another New York Times investigation, published in December 2022, exposes financial ties between the fossil fuel industry and the Texas Public Policy Foundation, which supported anti-ESG laws in Texas, West Virginia, Kentucky, Tennessee and Oklahoma. 

Even a cursory glance at data published by nonprofit research and transparency group OpenSecrets reveals large sums of donations made by the oil and gas industry to politicians behind anti-ESG laws. For example, OpenSecrets’ profiles on politicians reveals that Dan Crenshaw, an anti-ESG Republican member of the US House of Representatives from Texas (whose father worked in the state's oil and gas industry), received $235,469 in campaign donations from the oil and gas industry during the 2021-2022 election cycle. US Senator Dan Sullivan of Alaska, who was behind a May 2022 bill aimed at curbing the power of large asset managers like BlackRock, received $376,497 in campaign donations from the oil and gas industry between 2017 and 2022. 

The oil and gas industry’s historic donations to the Republican Party far exceed those to the Democrats, and its influence is only growing. 

Anti-ESG movement: What's the impact?

A case could be made that the ongoing theatrics around the anti-ESG movement have had a limited impact when it comes to investors acting to reduce their emissions. For example, while Vanguard’s exit from NZAM was significant due to its size and it being the first asset manager in the group, Vanguard was widely perceived as a laggard on climate ambition, having only committed $290bn, or 4% of its total assets under management, to a 50% reduction in emissions from its portfolio by 2030. 

Indeed, Vanguard was such a laggard that Buckley even suggests its exit could be a mutually agreed decision with GFANZ. Kyra Bell-Pasht, net-zero advisor at the Investors for Paris Compliance network, says GFANZ faces a question: is it better to have “a smaller net-zero alliance that is actually taking meaningful action, or a larger one rife with greenwashing?”.

Some – Morningstar’s global director of sustainability Hortense Bioy, for example – have expressed concern that Vanguard’s exit could trigger a ‘domino effect’. However, Buckley says he would be “very surprised” if BlackRock left too, because of the enormous opportunities of investing in the energy transition.

“Larry Fink has been working hand-in-glove with Michael Bloomberg and Mark Carney to work out how BlackRock can be a leader in deploying capital at [a] scale never seen before [in sustainability]… he [has] his eyes open to the $100trn investment opportunity,” Buckley argues, noting that through the Inflation Reduction Act, the US has this year instigated “the biggest clean energy stimulus package in history”.

The Sierra Club’s Cushing notes that as it becomes clearer that the anti-ESG movement will not be satisfied by anything short of total inaction on climate change, there are hints that financial institutions are starting instead to turn away from politics, and instead focus on what is best for their business and customers, which involves taking climate change seriously. UK bank HSBC’s recent decision to stop financing new oil and gas fields is a sign that financial institutions are pressing ahead with limiting their exposure to fossil fuels

A lot still hangs in the balance

Yet attacks on ESG investing from Republicans are likely to increase with the GOP winning back control of the US House of Representatives this November, and it is very possible that the chilling effect caused by their threats to large investors will prevail. Indeed, while some hold that antitrust laws are not a threat to net-zero initiatives, several unanswered questions remain around how investors’ commitments to net zero intersect with their fiduciary duties. 

Competition law is about preventing companies from colluding in order to raise their profits, while investors participating in a Race to Zero agreement are in fact foregoing profits, at least in the short-term – which is arguably exactly the opposite.

However, if investors concede they are foregoing profits in order to reach net zero, this could pose a challenge to their fiduciary duties. As O’Neill points out, when investors under NZAM made their commitment to net zero, it was not based on a thorough assessment of the impact of a 1.5°C future on their clients’ portfolios, because it was always unlikely they would ever meet this target. As such, they have committed to something that is not discernibly in their clients’ interests, because it may be “impossible” to achieve. 

If Vanguard is an example to go by, forward-looking targets can easily be abandoned. As such, O’Neill takes the position that it is better to engage with investees and set tangible policies such as HSBC has done for its oil and gas investments.