Culture Warriors Have New Straw Men: ESG and “Woke Capitalism”

The ongoing internal culture war in the United States now includes a full-frontal assault on the alleged “dangers” posed to certain investors by those asset managers who embrace sustainable investing and factor in ESG analysis for their portfolio decision-making in managing client assets).

Now “ESG” joins such straw men as Critical Race Theory, “Woke” Capitalism, “grooming” books in school libraries, and other specious arguments set up by political conservatives and Red state public sector leaders to gain points with the Republican base.

The assault on ESG is mainly focused on the prominent asset management firms that have relationships with state and city public employee pension plans and healthcare plans. These asset management firms are told to abandon ESG principles (and their focus on climate change) and related investment approaches -- or lose the state and/or city investment and capital raising client.

Leaders in Florida, Texas, West Virginia, Louisiana, and Missouri are openly opposed to “woke capitalism” as they see it and have targeted BlackRock, State Street, Vanguard, and other large asset management firms embracing sustainable investment.

ESG ratings firms are also in the cross hairs; 20-plus Republican state attorneys general also challenged ISS and Glass Lewis as both advisory firms expanded their traditional governance work to including “S” and “E” issues through a more comprehensive ESG lens. (These firms advise and provide services to public sector pension plans.)

Some Red state leaders are cutting ties with BlackRock and other firms and moving to prohibit the Wall Street organizations from management of state monies (such as their public employee pension systems). BlackRock CEO Larry Fink fired back at the annual Davos gathering to say that his firm, while losing about $4 billion in the public sector pullback of funds to be managed, has seen the flow of new money into BlackRock dwarfing that – new funds to be managed by BlackRock topped $200 billion in year 2022, he told the Davos crowd.

In his annual letter to corporate CEOs, Larry Fink wrote last year that “stakeholder capitalism is not about politics, it is not ‘woke’, it is capitalism.” Helping clients transition their investments toward a lower-carbon economy is helping BlackRock (with $9 trillion-plus AUM) to attract new assets to manage, CEO Fink explained.

The underlying concern of the Red state officials is about fossil fuels – their home state oil, natural gas, and coal assets. Texas and Louisiana economics are heavily dependent on production of fossil fuels and leads to the political opposition to ESG and recognition of the dangers posed by the climate crisis. While BlackRock is not eliminating fossil fuels from the assets it manages, or the products offered to investors, there is trimming going on (and at other major asset management firms as well).

Expressing concern on Capitol Hill, the Democrats in the House of Representatives formed a sustainable investment caucus to advocate for ESG policies and actions. Said caucus chair Sean Casten of Illinois to The Hill editors: “Given the significant growth of AUM in funds that prioritize ESG factors, Congress has a duty to craft policies that provide investor protection and transparency of information to market participants.”

The Securities & Exchange Commission has a rule under consideration to mandate disclosure of GHG emissions by publicly-traded companies. It is expected that the Final Rule could be issued April 2023. This will set off a firestorm in Red state territory, and among the congressional delegations from those states. For public companies operating in those states that have sizeable operations in the European Union, new ESG disclosure rules are also being put in place in the EU.

This year we will see significant conflict in the culture wars over climate change measures. The Federal government is in the lead addressing the climate crisis, Red state congressional leaders will challenge the SEC’s authority to enact ESG disclosure rules), and much more. The G&A team has assembled Top Stories below on these conflicts and we look forward to keeping you updated throughout 2023. We are at an important inflection point in the effort to seriously address the climate crisis, and in power circles the question posed is: which side are you on?

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.