ESG is a popular political punching bag right now, even in biz-friendly Utah
Brigham Young University business professor Ben Lewis has studied environmental, social and governance investing, or ESG, for over a decade. He rarely heard it discussed outside of work, so it came as a surprise when a candidate for local office started talking about it last year.
“As part of his platform, it was something about anti-ESG, concerns that this ESG movement was basically China's way to infiltrate communist ideologies within the country,” he said.
“ESG has nothing to do with China. And so I was really perplexed and like, what is this?”
The idea, Lewis said, is that companies should care about more than just profit. The philosophy takes into account things like how environmentally conscious a company is, how diverse its workforce is or how the company is run.
Banks also use it to evaluate companies for investment or lending. It’s also not a novel idea.
“It wasn't labeled ESG until probably the mid-2000s,” Lewis said. “But this idea that companies should be socially and environmentally responsible, it's been around since the ‘70s.”
A political football?
President Joe Biden issued the first veto of his presidency on March 20 blocking a resolution that would have stopped retirement fund managers from taking ESG factors into account in their investments. All of Utah’s congressional delegation was a unanimous yes on the resolution.
Republicans and some Democrats say the practice places political agendas ahead of profits. Biden’s veto drew a strong rebuke from Utah GOP leaders, including Gov. Spencer Cox.
“The people who manage the money, the retirement accounts of individuals in this country now don't have to worry about the returns that's making money so that you can actually retire,” Cox told Fox Business. “They can focus on these other things.”
But others don’t see it the same way. Lewis counters that investment firms would argue that by taking environmental and social governance risks into account “they are looking into the long-term profitability of companies.”
“For example, if you think of an oil and gas company — 50 years from now, are they going to be operating in the same way that they are now? Probably not.”
Lewis isn’t alone in that assessment. Fellow BYU business professor Chad Carlos added that any information that impacts a company’s performance is fundamental for investors to know — “it's likely that these three dimensions of environment, social and governance can have significant and material financial implications.”
In Utah, trashing ESG is all the rage. The Legislature passed a resolution in opposition to the investment practice this year. They claimed it harms the economy and unfairly limits the supply of energy from fossil fuels.
Attorney General Sean Reyes has signed on to lawsuits challenging it. And State Treasurer Marlo Oaks went as far as to call it part of “Satan’s plan” on March 11 at the Salt Lake County Republican Party Organizing Convention.
In other states like Texas and West Virginia, threats to the fossil fuel industry have motivated similar anti-ESG policies.
“I can understand how there are concerns that these large asset managers are going to screen out investment in [their] major source of jobs and economy. That could be an alarm for those states,” Carlos said. “And so I can imagine there's similar issues that are at play [in Utah].”
The City of Riverton passed a resolution of its own, instructing the city’s financial team to work with companies that prioritize profits. Mayor Trent Staggs said it really came to his attention while he was working on this year’s city budget. How different credit rating agencies were assessing the city’s debt caught his eye.
“I was looking over their rating of that debt and they do have environmental, social and governance factors now that are a part of it. I thought that was strange,” said Staggs. “I thought, ‘well, wait a minute, what on Earth does this truly political score have to do with our ability as a city to pay its debt?’”
How it works for financial institutions
The Utah Bankers Association was neutral on the Legislature’s ESG resolution. President Howard M. Headlee said Utah financial institutions feel caught in a political tug-of-war.
“We really just want to be banks,” he said.
But if banks are doing their job correctly, Headlee said they’re probably taking some ESG factors into account.
“Already when we make loans, we evaluate most of these risks anyway,” he said. “So if there's a financial basis, we're evaluating it. If there's not a financial basis, we probably shouldn't be evaluating it.”
For example, if a company has poor leadership practices, investors want to know that information.
According to Headlee, things get tricky when a powerful company tries to call the shots.
“Every business has the right to establish their own policies as it relates to these issues versus any business using their economic power to push their view on these issues on others.”
In the final analysis, it comes down to this question: Do businesses have the right to influence environmental and social policies, or is that the job of lawmakers?