[Ed. note: A brief history lesson – today is Texas Independence Day. The fight for independence from Mexico took a significant turn in February 1836 when around 200 Texan defenders, including American legend Davy Crockett, were besieged at the Alamo by a much larger Mexican army led by General Antonio López de Santa Anna. The defenders fought valiantly but ultimately lost the brutal battle. On April 21, 1836, General Sam Houston led a surprise attack on Santa Anna’s forces at the Battle of San Jacinto. “Remember the Alamo” was the Texans’ battle cry. The battle lasted about 20 minutes with no Texan casualties. Santa Anna himself was captured. Independence from Mexico was won and the Republic of Texas was established. Texas Independence Day is celebrated each year on March 2, the day in 1836 that the Texas Declaration of Independence was signed. In December 1845, The Republic was annexed into the United States, ending nine and a half years of independence. The Republic of Texas Legation (Embassy) building in London still stands, not far from St. James’ Square. So Happy Texas Independence Day! Let the cannon ring!]
Perhaps the most apropos song for ESG is “Dazed and Confused.” In Monday’s ESG in the News blog, I included an article about Carlyle Group being the first company to include governmental anti-ESG policies as a material risk factor in a 10-K. Carlyle is no longer alone. According to Financial Times:
“A dozen big US financial companies including BlackRock, Blackstone, KKR and T Rowe Price added language to annual reports filed in the past month cautioning that pressures such as ‘divergent views’ or ‘competing demands’ on environmental, social and governance (ESG) investing could hurt financial performance. The statements come in response to a campaign against what opponents describe as ‘woke capitalism’ that has drawn support from such high-profile Republican politicians as US Senate minority leader Mitch McConnell and Florida governor Ron DeSantis.”
The article gave a few examples:
- “Blackstone, the world’s largest private equity firm, disclosed that states’ scrutiny over potential ‘boycotts’ of the fossil fuel industry could affect fundraising and revenues, according to the 2022 annual report it filed with the US Securities and Exchange Commission last week. Divergent views on ESG increase the risk that action or inaction ‘will be perceived negatively by at least some stakeholders and adversely impact our reputation and business”…
- “State Street’s filing said scrutiny of ESG practices had become political and a reputational risk, adding that it had received information requests as part of states’ investigations.”
- “US Bancorp said ‘differing views’ among its stakeholders could damage its reputation.”
- “Morningstar, a data provider that also owns an ESG ratings business, said it has had to spend money to respond to political inquiries about its ESG practices.”
- “TPG and Ares all said in annual reports … that anti-ESG legislation could impede fundraising.”
The Uncertainty Grows
Red states continue to introduce and pass anti-ESG laws similar to those in Texas and Florida, which started the trend. Even so, some state agencies are pushing back against these new laws in their own states, claiming that complying with the law will cost taxpayers hundreds of millions.
Congress and the US Senate this week passed a resolution to reverse the recent Department of Labor rule allowing retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting. President Biden has already indicated he will veto the bill.
The risk isn’t only to financial services firms, however. Operating, design, engineering and manufacturing companies innovating in climate technology, clean energy, electrification and decarbonization are also impacted, as a main source of capital for them may be more tentative in their ESG investment strategies for a period of time. I expect we’ll see anti-ESG 10-K risk factors appear more widely throughout 2023.
Companies are caught in the middle of this anti-ESG flux – some states are, some states aren’t, others are but may not enforce; the federal government wants an anti-ESG law but regulations supporting ESG are in place and continue to be developed; companies seeking investment capital to innovate or expand may see the money flow cut off. It is mass confusion – no wonder the matter is seen as a material risk factor worthy of 10-K disclosure. We recently posted a podcast on ESG materiality determinations to help PracticalESG.com members understand concepts, ideas and considerations in evaluating ESG risks in the context of differing definitions of materiality.