ESG Investing and Corporate Fear of Climate Risk Disclosure

The House of Representatives released the first report from its ESG Working Group in late June, highlighting priorities for the rest of the 118th Congress and making clear that Republicans won’t stop “investigating” environmental, social, and governance investing while there’s still a chance to save polluting companies from having to report their actual emissions.

At its core, ESG is about information: When companies report on their environmental, social, and governance risks, which can range from high greenhouse gas emissions to particular hiring practices, investors use that information to determine whether they think a company is a good investment.

The Republican-led House isn’t the only entity that’s become obsessed with ESG investing over the past two years. From political advocacy organizations like the Texas Public Policy Foundation to state treasurers, the American Legislative Exchange Council and the Republican Attorneys General Association, the right wing has been on fire about this issue since the Securities and Exchange Commission made what seemed like a pretty boring announcement back in 2021: The SEC was going to help provide some stability in the ESG space by laying out parameters for how companies could disclose climate risk to investors that care about such things.

Absent those proposed guidelines, due to be finalized this year, it’s doubtful that an anti-ESG movement would exist. It only emerged after the SEC made its intentions known, despite the fact that ESG investing has been around for more than 20 years.

In fact, the same polluting industries and pro-industry politicians screaming about ESG as “woke capital” today previously embraced the idea. It was a handy greenwashing tool that also helped unlock easy capital for corporations that could lay claim, however spurious, to reducing emissions or improving the diversity of their workforce. The SEC’s suggestion that companies should disclose their Scope 3 emissions — the emissions associated with the entire supply chain of their product, including its ultimate use — set off the current frenzy.

To date, fossil fuel companies have preferred to report only on Scope 2 emissions — those associated with their own operations — which account for less than 10 percent of their overall emissions. Scope 3 reporting would require a full accounting, from upstream to downstream, with no way to distract from a company’s actual climate impact.

The ESG backlash has included the introduction of 165 anti-ESG bills across 37 states in 2023 alone, according to a report from Pleiades Strategy; a coordinated push by Republican state treasurers to kick investment firms that consider ESG factors out of state finances; and a legal strategy that has Republican attorneys general alleging that ESG investors are “colluding” against the fossil fuel industry. Now Congress has gotten in on the action, with the House Oversight Committee hosting two hearings on ESG in May and June, Finance Committee hearings expected in July, and proposed legislation in the works.

Just as remarkable as the speed with which this coordinated movement came together is the lack of support for it among Republican voters. According to a poll conducted by Penn State’s Center for the Business of Sustainability and the communications firm ROKK Solutions, Republican voters are even more opposed to limiting ESG investing than Democrats are. The Pleiades report found that out of the 165 anti-ESG bills proposed this year, only 22 were approved by state governments.

That hasn’t stopped GOP allies from ramping up the fight as the SEC inches closer to finalizing its climate risk disclosure guidelines. In the Oversight Committee hearing last month, Jason Isaac, who focuses on energy for the Texas Public Policy Foundation, an industry-funded conservative think tank, opened his testimony with the claim that has become central to the anti-ESG agenda: ESG investing violates antitrust laws.

It’s a legal strategy to derail ESG investing that Isaac helped create and has successfully imparted to some heavy hitters in the conservative policy space: the American Legislative Exchange Council, or ALEC, which brings state legislators together with corporate executives to craft legislation that limits regulation; the Republican Attorneys General Association; the Heritage Foundation; and Consumers’ Research, a political group funded by former Federalist Society President Leonard Leo. The argument is that financial firms considering ESG factors are “colluding” to boycott polluting companies, which amounts to an antitrust violation.

The watchdog group Documented shared audio with The Intercept from two ALEC planning sessions focused on ESG. “These companies are coordinating their activities,” Will Hild, executive director of Consumers’ Research, said during a panel conversation with Isaac at an ALEC meeting in July 2022. “They talk about how they’re going to set a policy across the market. Now, it’s been a while since I was in law school, but when I was there, that was antitrust 101.”

At another ALEC meeting, in June 2021, Isaac pointed to an investigation by the Texas Legislature’s state affairs committee as a key step in the legal strategy to combat ESG investing. “We anticipate truckloads of documents being delivered,” he said. “We believe that there is corporate collusion, liability risk for the ESG agenda to charge higher fees and rig the market. We believe that there’s antitrust violations. So I hope our committee gets a ton of paper back from these large financial institutions and they get hammered in the courts. And our attorneys general around the country file antitrust violations.”

At the Oversight Committee hearing in May, it was clear that Republican attorneys general planned to do exactly that. Alabama Attorney General Steve Marshall and Utah Attorney General Sean Reyes took up Isaac’s antitrust argument, focusing on groups like the Glasgow Financial Alliance for Net Zero, a global coalition of financial institutions that came together at the Glasgow climate conference in 2022 and committed to decarbonizing the economy.

“These alliances also hurt consumers through anti-competitive conduct,” Marshall testified. “Alliance members appear to be conspiring to restrain trade and commerce by colluding with other members to reduce competition among themselves and coordinating restricted investment in action toward specific companies unless ESG policy objectives are implemented. And let’s be clear, ESG activity is subject to antitrust laws.”

Marshall also noted that the Republican Attorneys General Association was aggressively pursuing the antitrust legal strategy. “Republican attorneys general have been active on the investigative side using both our consumer protection laws as well as the antitrust laws,” he said. “Multiple investigations are now pending.”

At the June Oversight Committee hearing, Isaac himself testified. “Today, I want to discuss with you the detrimental effects the collusory ESG agenda is having on American energy producers and why Congress must do everything in its power to stop this overreach into what is supposed to be a free market,” he said. “ESG investing isn’t just harmful to our economy and energy industry — it could violate antitrust laws.”

Isaac first introduced the antitrust legal strategy at the ALEC meeting in 2021. Soon afterward, several state attorneys general began acting on the Texas Public Policy Foundation’s advice. In March 2022, then-Arizona Attorney General Mark Brnovich launched an investigation into “this potentially unlawful market manipulation,” warning that climate disclosure might be “the biggest antitrust violation in history.” The following month, Utah’s Sean Reyes, alongside the state’s treasurer and congressional delegation, sent a letter to S&P objecting to the use of climate-related disclosures and warning that “state antitrust” statutes might be relevant. Missouri AG Eric Schmitt and Louisiana AG Jeff Landry also sent letters warning that ESG conflicted with “securities law.” In August 2022, a month after the second ALEC panel, 19 Republican state attorneys general signed onto a letter to the investment firm BlackRock alleging potential “antitrust violations” related to climate disclosures.

Far from “ensuring a free market,” as Isaac claims, regulations banning ESG considerations will limit investors’ access to information. The Democrats’ witness at the May Oversight Committee hearing, Illinois State Treasurer Michael Frerichs, pointed to the opioid investigations as a good example. “ESG is about looking at a wider range of risks and value opportunities that can have a material financial impact on investment performance,” he said. “If you’re investing in a pharmaceutical company, it’s thinking about whether that company has exposure to massive lawsuits because of its role in the opioid epidemic.”

“Making recommendations about which sectors to invest in — including expressing negative views about the risks of investing in a dying industry like coal, for example, or giving opinions about the benefits of investments, for example investing early in the transition to cleaner energy — does not violate the terms of the Sherman Act, the Clayton Act, or the FTC Act,” said Lisa Graves, executive director of True North Research, who formerly served as a legal adviser to all three branches of government. Such recommendations, she added, are “what investment groups have been hired to do on a daily basis for decades.”

According to Graves, sweeping anti-ESG legislation like the bill Florida Gov. Ron DeSantis recently signed into law is a violation of the First Amendment. “It’s actually dangerous for our society when officials use their public offices to try to chill freedom of speech and the sharing of vital knowledge and expertise,” she said.

The politicization of ESG investing and the threat of antitrust suits has already had a chilling effect. Earlier this year, BlackRock President Larry Fink estimated that the ESG backlash had cost BlackRock $4 billion. In April, Munich Re, the largest reinsurer in the world, left the insurers subgroup of the Glasgow Financial Alliance for Net Zero, citing the “material legal risks” of continued membership. BlackRock’s top competitor, Vanguard, left another group targeted by the anti-ESG movement — Net Zero Asset Managers — and sent its CEO Tim Buckley on an apology tour. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests in,” Buckley told the Financial Times, adding that Vanguard was “not in the game of politics.”

Meanwhile, the SEC has delayed the finalization of its climate risk disclosure guidelines. Although the agency has not confirmed that the delay has anything to do with the threat of legal action, the parallel timing is hard to ignore.

“We won’t really know how successful that pressure has been until these rules come out,” said Jesse Coleman, a researcher with Documented who’s been following the ESG backlash since it began. “But the thing that we can predict is that they’re gonna get sued. And there’s going to be a lot of legal wrangling around these rules once they’re published.”