One of the most important policy battles of 2023 is already happening quietly and outside of the media spotlight. Indeed, many Americans are completely unaware that it is underway. It is over the Left’s ESG (environmental, social and governance)-driven investments and their corrosive effect on the country.
Over the past two years, the Left has launched a determined campaign to advance their climate, gun-control, and abortion objectives not through legislation, but through the allocation and denial of capital.
The proponents of ESG-driven investments are using woke investment firms like BlackRock to phase out fossil fuels, weaken agriculture, hobble the firearms industry, and punish corporations that don’t support abortion. They do so by starving the offending companies of capital and insurance coverage. Worse, ESG- driven funds have waged this war on disfavored companies often without the knowledge or consent of the owners of that capital. And the Biden Administration has been supporting their efforts.
But in the first two months of 2023, a significant number of states have been fighting back. Last week, I and 23 other state attorneys general joined the Utah attorney general in suing the Biden Administration over new Department of Labor regulations that allow managers of retirement funds to consider non-financial, ideological factors when investing allocating retirees’ assets—in direct violation of the Employee Retirement Income Security Act of 1974 (ERISA).
State legislatures have joined the battle as well. In the past year, 17 states have introduced bills to stop the investment of state pension assets in ESG-driven funds. The 2023 legislative session is the battlefield on which most of those state efforts will succeed or fail.
On Thursday, the legislative battle in the states just hit a new level of intensity. The strongest anti-ESG bill in the country, SB 224, which I helped draft, was introduced in the Kansas Legislature.
Most of the anti-ESG bills pending in state legislatures address only the state pensions issue, which is certainly a large problem that needs to be addressed. The pensions of state workers should never by commandeered to advance a partisan agenda. ESG-driven funds usually deliver a much lower return on investment, to the detriment of the state workers whose pensions are at stake. In the past year, the ten largest ESG funds by assets have all posted double-digit losses, with eight of them underperforming the S&P 500.
But the Kansas ESG bill goes much farther. Not only does the Kansas bill prohibit the investment of state pension assets in ESG-driven funds, it also prohibits banks from using ESG criteria in denying loans to companies and prohibits insurance companies from denying coverage based on ESG considerations.
In addition to that, the Kansas bill also defends private investors against the surreptitious use of ESG factors in the management of their investments. It requires registered investment advisers to disclose to clients when their money is being invested in ESG-driven funds and requires written consent from the client before such investments can be made. This section of the Kansas bill could cause a tidal shift in investments, especially if other states follow suit and enact similar disclosure rules. Right now, billions of dollars in private assets are being invested in ESG-driven funds without the knowledge or consent of the investors.
This informed-consent requirement would undoubtedly prompt many private investors to choose higher returns on their investment over leftist ESG policy goals. Regardless, it’s their money. They should be informed about their prospective investments and should be allowed to choose.
If the Kansas bill and the bills pending in other states pass, ESG-driven funds will be hit hard. The reinvestment of billions of dollars in multiple states’ pensions funds will have a colossal impact. The politically-incorrect companies targeted by the ESG movement will receive greater access to capital, loans, and insurance.
And if the 25-state lawsuit results in the Biden Labor Department’s regulation being enjoined, then assets in private retirement plans will have a layer of protection as well.
The states will have scored two massive victories. But the battle is only just beginning.
Kris W. Kobach is the attorney general of Kansas. He was formerly the secretary of state of Kansas, in 2011-19. Prior to that, he was a professor of constitutional law at the University of Missouri—Kansas City.
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