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In-depth: The US culture wars are heating up

Published: 12 May 2023

The US backlash against ESG is broadening, moving from mainly focusing on environmental issues to target diversity, equity and inclusion. European investors are being drawn in, writes Christopher Walker.

Thirteen US states have now passed anti-ESG legislation with implications for global capital markets | Da-kuk on iStock

In brief

  • Thirteen US states have now passed anti-ESG legislation
  • They target not just environmental policies but also broader DEI initiatives, where the right is being raised to action
  • This backlash is starting to have an effect. One leading manager quit the Net Zero Asset Managers Alliance, others are following
  • European managers operating in the US will inevitably be affected
  • While efforts are underway to counter this backlash, there are serious implications for global capital markets

The culture wars are heating up in the US. Last year, state legislators began punitive measures. Florida adopted a resolution which prohibited state fund managers from considering ESG factors, while Glen Hegar, the state comptroller of Texas, published a list of financial companies and funds and ordered state funds to divest holdings, and stop investing with those companies.

Steven Rothstein, Ceres

Hopes were high amongst the impact community that such measures would prove short-lived. But if anything the backlash has actually gained momentum. Steven Rothstein, managing director, Ceres Accelerator for Sustainable Capital Markets, notes: “There is definitely a lot of activity at the moment. Over a hundred bills have been introduced aimed at restricting ESG in some way at a state level. The good news is that forty of these have failed. But 13 have passed.”

For example, last month in Kansas a law was passed which restricts the $24.3bn Kansas Public Employees Retirement System, Topeka, from entering into any contracts with money managers who even consider ESG, and prohibits Topeka from restricting investments in fossil fuel-based energy, mining and greenhouse gas emissions, firearms manufacture or sales, and to avoid “facilitating or assisting with abortion or gender reassignment”.

Widened focus

This last point is telling. It appears that the anti-ESG backlash has widened from opposition to environmental measures to an attack that includes diversity equity and inclusion (DEI). “Most people don’t understand what ESG means,” says Rothstein “and the opposing side have weaponized it and thrown together everything from which bathroom you use to standing against critical race theory [CRT]’.

The anti-ESG moves are starting to have an effect according to Paul Herman, CEO of HIP Investor (Human Impact + Profit). “One risk is that these laws can be applied to investors espousing pro-ESG principles and allocations. Even ratings providers like Sustainalytics/Morningstar have been attacked by this approach, and the result has been Morningstar stopping some forms of custom[ised] ESG reports.”

The US presidential election is ramping up to 2024, and as Herman continues “the ongoing campaigns against going “woke” (pro-ESG) are escalating the rhetoric as well as actions. Some state-managed portfolios are starting to withdraw from ESG funds. Also, Vanguard has been spooked and departed the Net Zero Asset Managers alliance.”

Florida, one of the state’s with the lowest altitudes and largest coastlines, has now passed an anti-ESG law that bans investors from issuing a bond with an ESG or green designation. “This likely will result in higher cost of capital, and more limited liquidity for those bonds,” says Herman. The state has also moved to penalise Disney for its perceived ‘wokeness’.

European fund managers join the fight back

It should not be thought that US impact investors are standing idly by. The Ceres Investor Network of 220 managers and more than $60trn in assets, has “mobilised a coalition of investors against this trend Impact-minded investors must come together to fight back,” says Rothstein. The organisation argues for the “freedom to consider the economic impacts of climate change in decision-making.”

“Will European investors be put off?” muses Rothstein. “I hope not. Though it is true that some of the restrictions are significant in some of the states.”

Herman adds: “Investment funds characterised as ESG are less likely to gain allocations from these anti-ESG state pensions.”

Raj Thamotheram, independent adviser

Raj Thamotheram, a senior adviser to many large European investors, notes that no one wants “to be the first to stick their heads above the parapet given what’s happened with Disney. Initially they thought it was a storm in a teacup in a few states but now they see it has much deeper roots”.

Some are sticking their heads up. One of the signatories to is European impact manager Impax. Ed Farrington, head of distribution, North America, tells us: “Investment choices and decisions should be left to qualified financial professionals and fiduciaries – they should not be determined or limited by politicians. For politicians to prohibit investment managers from analysing ESG factors – for example, deliberately ignoring flood risk in a maritime state – strikes us as short-sighted. Restrictions on ESG analysis amounts to a limit on investment freedoms.”

Spill over to Europe?

There are also fears about the broader impact on interlinked capital markets. .

Herman notes “these seismic shifts in US state policies and pensions are rippling through capital markets globally including Europe”.

Fran Seegull, U.S. Impact Investing Alliance

Fran Seegull, president of the U.S. Impact Investing Alliance, observes that “while the anti-ESG movement is concentrated in the United States, global investors are taking notice”. There are numerous efforts already under way to standardise and harmonise international reporting frameworks, highlighted by the work of the International Sustainability Standards Board (ISSB). “There is a clear threat to market cohesion should global and US regulators adopt divergent disclosure regulatory regimes,” she says.

Thamotheram adds: “Given the global dominance of US headquartered firms in all parts of the financial sector (fund managers, investment consultant, auditors, credit rating agencies, etc) this is bound to have spill over effects. That Munich Re, Zurich Insurance and Hannover Re pulled out of the Net Zero Insurance Alliance is an indicator of what chilling effect and it’s also resulting in copycat activity in the UK.”


Most impact investors appear optimistic over the long term. Rothstein says: “Overall the market is very powerful, and investors and companies are still moving forward towards net zero. I hope in the future that people focus on fact filled discussions rather than fact free statements.”

The problem is that for the next eighteen months until the presidential election is over the internecine warfare seems likely to worsen. Every gesture on the left being met by greater backlash on the right. Impact investing will suffer casualties as a result of this war.

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