KCC Deep Dive: The Attack on Socially Responsible Investing

During the 2022 General Assembly, the legislature passed, and the Governor signed, SB205, “An Act relating to state dealings with companies that engage in energy company boycotts.”

The Kentucky Conservation Committee strongly opposed this legislation because it claimed that investment firms and corporations were colluding to force fossil fuel companies to transition to clean energy by boycotting fossil fuel companies. 

As a result of this bill, the legislature deemed that the state must not do business with the firms and companies that are boycotting fossil fuel companies, and required the Treasurer to prepare a list of companies that have engaged in energy company boycotts. The bill specified that the Attorney General or the Treasurer may bring any civil action necessary to enforce the Act.

In the case of SB205, we felt at the time that the bill was largely symbolic, because most financial firms and companies choosing not to invest in fossil fuel companies are doing so as a valid, ordinary business purpose. But the pressure of the anti-ESG movement is gaining momentum.

What is ESG?

The target of this is the trend of socially responsible investing, also known as ESG, which stands for “Environmental, Social and Governance” investing. These are non-financial factors investors use to measure an investment or company's sustainability. Environmental factors could include the impacts of pollution such as carbon emissions. Social factors could include things such as human rights or fair labor practices. And governance factors could include consideration on how a company is run— such as the diversity of the board, political and lobbying activities, or pay scale.

Major banks and investment firms are responding to market forces by making the conscious decision to invest using these principles, and the market for these investments has grown rapidly. 

The Financial Stability Oversight Committee created to protect consumers after the financial crisis of 2008, identified climate change as a threat and has encouraged greater disclosures around climate risks and investments.

However over the last several months, scrutiny over the subjectivity of ESG criteria has increased, paired with aggressive actions by several states.

While the passage of Kentucky’s SB205 seemed to be a bit unusual when it was signed into law last session, it turns out that it was not original. The state of Texas, as detailed in this article from E&E Climate News, has also been focused on anti-ESG legislation, as well as a resolution recently passed in Florida. As a matter of fact, more than a dozen states are now involved in anti-ESG actions. 

How has Texas fared?

It has been reported that Texas’ anti-ESG purge set a dangerous precedent, by empowering state officials to weaponize public retirement funds and other state money against political adversaries. By arbitrarily limiting the companies that Texas may do business with, its anti-ESG policies are already costing cities and workers millions of dollars, while adding a distorting pressure to the economic data that underpins global finance.

For officials, the Texas model served a dual purpose. Using ESG research to blacklist companies could chill the circulation of corporate sustainability data. And a paper trail could make it easier for officials to justify their actions to the public — including some who wanted the state to sanction even more companies.

What is the current situation in Kentucky?

During the September 22nd meeting of the Interim Joint Committee on Natural Resources and Energy, lawmakers heard presentations from the Attorney General’s office that included a dialogue on ESG investing, where they raised concerns that there was a coordinated effort by major corporations to push their ESG activism into banking decisions.

In May of this year, the Kentucky A.G.’s office stated an opinion that it believed these practices were not consistent with the fiduciary mission of Kentucky and the Employee Retirement Income Security Act (ERISA).

This was followed with a letter to the CEO of BlackRock Corporation, where Kentucky has $1.5 billion in pension investments. In August of this year, 19 state attorneys generals, including Kentucky’s Daniel Cameron, sent an eight page letter that outlined how the group believed that BlackRock Investment Group was using “the hard-earned money of our states’ citizens to circumvent the best possible return on investment” and further stated “Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda.”

Axios’ Alayna Treene reported in August that these attacks on firms such as BlackRock are part of a coordinated lobbying effort that is anticipated to increase after the November midterm elections.  

The presentation from the Kentucky Attorney General’s office to Kentucky lawmakers raised questions regarding the Glasgow Financial Alliance for Net Zero, which has brought together 160 firms with $70 trillion in assets to accelerate the transition to net-zero emissions by 2050.

During the September 22nd testimony, the Attorney General’s office mentioned that it has formed an ESG working group to challenge these initiatives. Therefore we anticipate more to come during the upcoming legislative session.

Companies have been adopting ESG policies for decades. They are nothing new. ESG policies continue to be implemented because companies have found that they make them stronger, more reflective of the communities they operate in, and more successful. We are discouraged that this new political attack on responsible corporate ESG leadership comes at a time when Kentucky continues to realize the damage from over a century of capricious corporate activity, especially in Eastern Kentucky. 

Next Steps- Join us for a discussion

Join KCC on Tuesday, October 4th at Noon Eastern for an open discussion on Zoom about this issue and ways to address it in anticipation of the upcoming legislative session. Register Here.

(You may also view the full video of the September 22nd Interim Natural Resources and Energy committee meeting here).