After failing to advance their agenda by passing laws in Congress, progressives have found that they can impose their will on Americans just as effectively through our financial system. And while some state officials have recently started to fight back, they are heavily outgunned.
The world’s largest asset managers, BlackRock, State Street, and Vanguard, have signed on to the global Net Zero Asset Management Initiative and together use the $20 trillion of other people’s money that they manage to pressure companies whose shares they own into pursuing environmental and social-justice causes. Progressive state pension fund managers in California, New York, Maryland, and even Texas are doing the same with the trillions in retirement funds that they manage.
The various elements of this ideology have come together under the umbrella of “environmental, social and governance” finance (ESG), and its advocates now include the world’s largest banks, asset managers, pension funds, rating agencies, proxy agents, as well as numerous international corporate clubs including Climate Action 100+, the Global Investors Statement to Governments on Climate Change, the Net Zero Asset Managers Initiative, and the Glasgow Financial Alliance for Net Zero.
ESG also has the support of the Biden Administration’s Securities and Exchange Commission, which announced it will require all listed companies to provide extensive reporting on their greenhouse gas emissions. It has the support of the Department of Justice, which just declared it would focus on “environmental justice,” and the Department of Labor, which announced it will no longer enforce a Trump-era regulation that barred private pension managers from including political causes such as ESG in their investment decisions.
The collective goal of these groups is to leverage their financial power to enforce the behavior that they want to see, targeting in particular fossil fuel producers and the gun industry. “Behaviors are going to have to change,” BlackRock CEO Larry Fink stated in a panel discussion last March. “You have to force behaviors and, at BlackRock, we are forcing behaviors.”
BlackRock is the world’s largest asset manager, with $10 trillion in assets under its management. In his 2022 letter to CEOs, Fink wrote that “every company and every industry will be transformed by the transition to a net zero world.” Bloomberg News reported that ESG financial assets are growing exponentially and will reach $50 trillion by 2025, representing more than one-third of the $140 trillion in assets under management worldwide.
But some state officials see the ESG movement as a misuse of money that was entrusted to asset managers by pensioners. A study by the Boston College Center for Retirement Research reported that ESG investing reduced the returns to pensioners by 0.70 to 0.90 percent per year, largely because ESG investment funds, which are actively managed, charge higher fees than non-managed index funds. This means higher profits for asset managers, less money for retirees.
And for all the added costs, many question whether ESG investing is doing much for the causes it claims to support. A research report by Columbia University and the London School of Economics stated that companies in ESG funds have “worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds.”
Tesla CEO Elon Musk recently called ESG “an outrageous scam,” adding that “it has been weaponized by phony social justice warriors.”
“If BlackRock has their own money and they want to be activist investors, I think people have the right to deploy their own capital as they see fit,” said Scott Fitzpatrick, Missouri State Treasurer. “The problem here is that it’s other people’s money they’re using, and people don’t want their retirement money used for political purposes.”
Increasingly, state officials are discovering how state pension money is being used to support “the religion of global climate change,” said Derek Kreifels, CEO of the State Financial Officers Foundation. “Now we’re seeing the veil drop on how they’re weaponizing it. Now they’re starting to include all these other [social] issues as well.”
Activist asset managers vote the shares they manage to influence corporate executives, and this explains to a great extent why Disney, a producer of family entertainment, now advocates for sex education in elementary schools; why Delta, Coca Cola, and Major League Baseball fought against Georgia’s voter I.D. law; and why Citibank has fought against laws restricting abortion in conservative states and has curtailed lending to gun makers and retailers—all of which are political causes that have nothing to do with running their businesses. The Wall Street Journal reports that activist asset managers are now putting pressure on Walmart, Lowe’s, and TJ Maxx to take a stand against abortion restrictions.
But for all the headline-grabbing statements from CEOs on political and social issues, progressive asset managers have been content to operate quietly behind the scenes in boardrooms, shareholder meetings, and global conferences.
“If they were ever to admit what they’re really doing, they would be creating untold liability for themselves,” Fitzpatrick said. “It’s inviting lawsuits galore for people who can say, ‘you have violated your financial duty to us.’”
“As an asset manager, the only thing you have is trust,” said Utah State Treasurer Marlo Oaks. “If you violate that trust, your business is gone. The investment managers that are pushing this agenda are ultimately risking the very franchise that they’re using to drive it.”
By colluding against fossil fuel companies, Oaks said, banks and asset managers “are actively implementing economic sanctions. We need more capital going into oil and gas production and there are great opportunities there to make money. Why isn’t the money going there? Why aren’t capital markets working, like they have in the past? It’s because of ESG.”
One by one, conservative states are starting to push back through legislation and legal actions. Kreifels said that 23 states have now taken some form of action to prevent state money from being used to support political causes. This, The New York Times wrote, has had a “chilling” effect on progressive initiatives, though how much of an effect remains to be seen.
In May, Oklahoma passed the Energy Discrimination Elimination Act, modeled on laws that were passed in Texas last year, which bars the state from conducting business with banks or asset managers that discriminate against fossil fuel companies. A similar bill in Oklahoma does the same for those that discriminate against gun manufacturers.
Last week, Kentucky Attorney General Daniel Cameron issued a legal opinion, stating that the use of state pension money for “environmental, social and governance” was a conflict of interest and was “inconsistent with Kentucky law governing fiduciary duties.” Cameron criticized the “increasing trend among some investment management firms to use money in public and state employee pension plans – that is, other people’s money—to push their own political agendas and force social change.”
In December, Florida revoked proxy authority for asset managers, meaning they no longer have discretion to vote the shares that they manage for Florida pensioners. Gov. Ron DeSantis stated that this “will clarify the state’s expectations that all fund managers should act solely in the financial interest of the state’s funds.”
In November, Arizona Attorney General Mark Brnovich launched a formal investigation into progressive financial institutions’ “anticompetitive conduct,” accusing them of “threatening and intimidating companies if they do not comply with their left-wing agenda.”
Also in November, Louisiana barred JPMorgan from underwriting its municipal bonds because of its policies against gun manufacturers. West Virginia and Texas recently passed legislation blocking finance companies that discriminate against fossil fuel producers from municipal contracts.
“Next week, we’ll be sending out letters to financial institutions that are going to be put on a list that is going to bar them from contracts in the state of West Virginia,” said Riley Moore, West Virginia’s State Treasurer. “We’re an energy state and this is an existential threat to our economy.”
“We need energy independence in this country,” Moore said. Countries in Europe are now realizing that their green energy policies have caused unaffordable price spikes for fuel, led to a risk of blackouts when the wind doesn’t blow, created a dangerous dependence on countries like Russia, and in many cases actually increased the carbon footprint. “It’s because they rushed into this ESG nonsense,” he said “You can call it sustainable, but it can’t sustain a grid.”
In addition to what many see as a misallocation of state pension money, there are the bigger legal and societal issues around using the financial system to “force behaviors.”
“This seems to me to be using Wall Street to accomplish what the left was unable to accomplish through democratic means,” said Nebraska State Treasurer John Murante. If progressive policies had public support, they could enact laws democratically through Congress, he said. Instead, “they’re going around the democratic process and attempting to do indirectly what they were incapable of doing through persuasion and logic and reason.”
ESG investing would lose in the court of public opinion “because it’s incredibly unpopular. ESG is the 2023 version of CRT,” Murante said, referring to Critical Race Theory in schools. “It has been integrated into institutions without people knowing about it, but when they become aware of it, there is genuine national outrage.”
Going up against the world’s largest financial institutions and the Biden administration is a formidable task for state finance officials, however, and they have a long and difficult road ahead. But Murante says he’s feeling optimistic.
“We have three profound advantages on our side,” he said. “First, we’re right on the issues; second, we’re right on the law; and third, we have the people with us.”
“It’s a David and Goliath situation,” Kreifels said. “But David won.”