Why the ESG vs. GOP war over climate change is going nowhere

Wall Street is no stranger to culture wars, dating to William Jennings Bryan and the 19th-century free silver movement. Today’s version: The push by conservative states to make state pension funds stop doing business with money managers who use their power to press companies to cut carbon emissions.

There’s a list of reasons to suspect the pushback won’t much affect the movement toward investing that factors in environmental, social and corporate governance goals alongside shorter-term financial performance.

First, the  blowback to ESG is confined to a few states so far, with Republican politicians in other states raising issues but taking only limited action. Even where states have acted, the steps seem likely to have little impact on investment firms that consider ESG in choosing stocks – which is nearly all major asset managers. And politicians are preparing for an assault on ESG based on antitrust claims – but institutional investors have framed their strategies to steer clear of legal theories Republican state attorneys general are pursuing, legal experts say.

“It’s not only vaporware, it’s ridiculous vaporware,” said David Nadig, an expert on exchange-traded funds and financial futurist at VettaFi, which owns ETFDatabase.com. Vaporware is software-industry slang for products that are announced but never reach store shelves. “They say they’re boycotting companies that are boycotting the energy industry, and then they find out BlackRock manages energy funds.” 

The tussle between conservative states, with officials in Florida and Texas being the most vocal, and Wall Street is specifically about how investors should use their money to take sides in debates over energy policy and climate change. More broadly, it’s another front in America’s culture wars, with politicians positioning themselves as fighting back against what Florida Gov. Ron DeSantis calls “woke” corporations.

“Corporate power has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity,” DeSantis said in a July 28 statement announcing that the state would bar its pension funds from considering ESG criteria in making investments.

ESG is a branch of investing based on screening securities based on their issuers’ environmental, social and corporate governance practices. Companies with low carbon emissions, transparent governance and good labor relations, for example, may get high ESG scores from arbiters such as Sustainalytics and Standard & Poor’s. Companies that make tobacco, oil and weapons often do poorly.

Some ESG investments are separated from other stocks, held by mutual funds and exchange traded funds specializing in companies that either have high ESG scores or avoid certain industries, including fossil fuels. A much larger number of funds continue to hold stocks in…