ESG: What is it, and why are some Republicans running against it?

Published 4:20 pm Monday, August 28, 2023

There’s a new acronym floating around the Kentucky political sphere – ESG.

At the official launch of the fall campaign season at the Fancy Farm picnic, several Republican candidates declared their intentions to fight against it.

What is ESG, and why does it matter?

ESG is an investment strategy that rewards companies that meet certain environmental, social and governance criteria.

The environment aspect relates to whether companies are being conscious of their impacts on the environment and taking steps to reduce the harm their activities may cause. This is typically the main focus of ESG investments.

The social part deals with how the company treats its customers and employees, potentially including things like diversity and community involvement. Governance refers to the degree to which company leadership holds itself accountable when it does something wrong.

The strategy has gained traction in recent years. Now, many Republican states are pushing back against what they see as a “woke,” “progressive” movement that pursues liberal goals.

Kentucky Treasurer Allison Ball is one of the Republicans leading the charge against ESG.

As treasurer, Ball monitors state investments, oversees pensions and manages state financial accounts. She said that considering ESG would lead to worse returns on Kentucky’s investments and pensions.

She said that since the focus is not solely to get the best possible returns, but also to leverage investments to further certain desired outcomes, it’s not the best choice for Kentucky.

“The ‘E’ part has been really big over the last few years because there’s really been a push to try and eliminate the coal industry in the United States and around the world,” she said.

Kentucky is the seventh largest coal-producing state in the country, making ESG a potential threat to its economy, Ball said.

Michael Bowman, Democratic treasurer candidate and former bank officer, disagreed with Ball’s assessment of ESG.

Bowman, who was previously a bank officer, said that investors need to look more holistically at the long-term effects of investments.

He cited eastern Kentucky as an example. Changes in the climate have led to wide-scale flooding in the region, which has been ecologically damaged by over-mining and strip mining, he said.

“And so what are we spending in terms of dollars fixing those problems after the fact?” he said. “I may have made $1 on the front end with that investment, but am I spending $5 to clean up the mess that that company made?”

Is ESG effective?

University of Kentucky economics professor Dr. Ken Troske said that while energy from coal is a small portion of the state’s economy now, any investment strategy that limits choices is bound to hurt returns.

There’s a question of how significant the difference is, though, he said.

“When you look at what an ESG fund looks like relative to a standard fund, the difference is pretty small, which is probably why you don’t see a lot of differences in returns between ESG funds and non-ESG funds,” he said.

No matter the size of the difference, Troske said research shows that ESG may not be as effective as it appears.

“There has been research suggesting that not only are ESG funds not successful in moving companies, to changing companies’ behavior, they may end up hurting the economy or the environment because these ESG efforts are poorly targeted,” he said.

Troske said ESG rewards “green” companies for something they are already doing.

Many of these companies are large financial institutions that are unlikely to get much “greener,” since they aren’t manufacturing things or adding much pollution into the environment in the first place, he said.

But at the same time, ESG takes money away from so-called “brown” companies that are not environmentally clean. With less disposable capital, these companies are less likely to experiment with innovative, greener methods.

“They’re the businesses that can make the biggest difference in the environment if they change their behavior, because they’re the ones that are polluting the most,” Troske said.

“But what you’re doing is you’re making it harder for them, you’re making their cost of capital higher so they’re less willing to experiment with different ways of producing because again, they have to get a return for their investors.”

An NYU analysis of corporate studies found that 58% saw a positive relationship between ESG policies and financial performance, while 21% saw mixed results, 13% were neutral and 8% were negative.

What is Kentucky doing about ESG?

Kentucky is now the strongest anti-ESG state in the nation, thanks to a pair of laws passed during the past two legislative sessions.

In 2022, Senate Bill 205 – a fossil fuel boycott bill – was signed into law.

The bill, pushed by Ball, was Kentucky’s first “serious effort” to protect Kentucky’s fossil fuel industries, she said. It directs the treasurer to create a list of financial companies that have participated in energy company boycotts. If the listed companies refuse to stop their boycott, state agencies would no longer include them in pensions, investment portfolios or government contracts.

The County Employees Retirement Systems, part of the Kentucky Retirement Systems, objected to SB205.

In February 2023, CERS Chair Betty Pendergrass sent a letter to Ball stating that CERS would not comply with the law since its requirements were “inconsistent with its fiduciary responsibilities.”

Kim Reeder, Democratic candidate for auditor, said she agreed with Pendergrass. She said ESG is just one element of risk management that investors keep in mind alongside other trends, like the international political climate and the economy.

At the same time, according to Louisville Public Media reporting, the Republican Party of Kentucky Building Fund accepted contributions from companies with ESG policies – $1.85 million between October 2022 and April 2023, 78% of its total contributions.

The second bill, 2023’s House Bill 236, required investments in the state pension system to only consider financial interests, not any environmental, social, political or ideological interests.

Now, Ball said the main way of fighting against ESG is enforcement and oversight over those laws, and keeping an eye on what’s happening globally with ESG, since it is “an ever-evolving issue.”

Ball is running for state auditor this November, and part of her platform is to do just that.

Alongside her is treasurer candidate Mark Metcalf, who told fellow Republicans at an August campaign event that they could count on him to stand against the “woke investment banks.”

Bowman said he thinks the ESG emphasis is a political move designed to confuse Kentuckians so that Republicans can capitalize on the issue.

Troske added that Kentucky’s anti-ESG laws are not the most effective way to fight against the investment strategy. Instead, he said legislatures should allow the market to function without trying to strong arm the economy.

“Traditionally, Republicans recognize that the government doesn’t need to intervene in these sorts of things,” he said. “If the ESG movement isn’t particularly effective, it’ll go away on its own.”

Kentucky Treasurer and Republican Auditor Candidate Allison Ball speaks at Fancy Farm on Saturday, Aug. 12, 2023.

Democratic treasurer candidate Michael Bowman speaks at Fancy Farm on Aug. 12.