Sen. Cassidy introduces anti-ESG investing bill

The growing anti-ESG investing movement claimed a powerful ally last week when U.S. Sen. Bill Cassidy, M.D. (R-LA), introduced a bill to prohibit asset managers from favoring environmental, social, and governance factors when evaluating people’s retirement plans.

Cassidy, the ranking member of the Senate Health, Education, Labor, and Pensions Committee, said potential investments should be evaluated only with regard to financial performance and not on progressive factors.

“Asset managers should prioritize helping Americans achieve the best return for their retirement, not funneling their clients’ money to fund a left-wing political ideology,” Cassidy said. “This legislation protects 152 million Americans who depend on a strong retirement to live after their career is over.”

Two years ago, the U.S Department of Labor released a rule to allow asset managers to prioritize ESG factors when choosing investments on behalf of clients, even if the investments result in reduced financial returns. Cassidy’s bill would do away with the ESG calculus, joining several states that have already banned or restricted the effort,

16 states so far have banned considering ESG

Lawmakers in nearly 40 states have introduced anti-ESG bills, with 16 states enacting such legislation. Some of the bills prohibit states from considering ESG factors in its pension investments and ban state and local governments from issuing ESG bonds. In Florida, the state pulled about $2 billion of funds from BlackRock investment manager over its use of ESG considerations.

Cassidy previously opposed ESG investing by co-sponsoring a bill to overturn the ESG rule, which was passed by Congress but vetoed by President Biden.

The backlash is almost entirely based on culture war prospectives with ESG opponents calling the practice “woke capitalism,” and warnings that ESG investing pushes a “secret liberal political agenda.” Support or opposition to the notion generally break along political party lines.

Simply, ESG investing allows portfolio choices based on subjective, rather than accounting, factors. Proponents say traditional shareholder capitalism is too narrowly focused on returns to shareholders while ignoring negative impacts of investments in such areas as fossil fuel companies, weapons manufacturers, and tobacco makers. ESG is offered as an alternative that expands the scope of issues considered by fiduciaries.

Investment community divided

The investment business is divided on the benefits of ESG investing. Some support it because it can lead to prudent risk management and potentially better retirement outcomes. Consumers, meanwhile, often demand limiting investments to companies they believe in, and advocates see ESG investing as a tool to propel climate change initiatives and other environmental and sustainability issues.

Some states, like Missouri, South Dakota, and Nebraska, decided against supporting several anti-ESG bills when some pension funds, local bankers, and Chambers of Commerce said the legislation would cost their states’ teachers and government workers billions in lost pension returns, and limit investors’ ability to make sound investment decisions.

“There is significant amount of compelling research showing increased risk adjusted return for ESG investments,” said Nick Cantrell, founder, and wealth advisor at Green Future Wealth Management, of Worcester, Mass. “At its core, ESG investing is simply taking into account a larger dataset of factors when selecting securities, so it is difficult to see how it would be incompatible with fiduciary advice.”

Cantrell notes that’s ESG investing is often already used by faith groups, churches, and conservative investors.

“Should individual investors or even churches that disagree with abortion be forced to purchase the stock of companies that manufacture abortifacients?” Cantrell asked. “Apparently Senator Cassidy believes they should, as his proposed bill would also limit asset managers from excluding securities based on the values and beliefs of churches, corporations, and individuals.”

Courts: ESG investing is free speech

The courts thus far have considered ESG investing a free speech issue.

One study by Harvard Business School found that companies that focused on sustainability outperformed their peers in terms of stock price and profitability. Another, study by MSCI, said companies with high ESG ratings experienced lower cost of capital and higher profitability compared to companies with low ESG ratings.

But later studies, including one published in the Harvard Business Review, said not only do ESG investors suffer from underperformance, but they may also not be receiving the ESG value they expected.

Matt Miller, managing director of capital markets at Phoenix Capital Group Holdings, in Denver, calls himself "wildly anti-ESG” because he believes it puts subjective and often uninformed provisions into matters that capitalism already addresses.

“Why do I need other people or my employer making personal decisions on my behalf?” he said. “I think it's an overreaching, misguided set of processes that were likely initially for the right reasons. But, like most experiments at this scale, it morphed into something that doesn't look much like what was intended."

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].