Republicans are stepping up their efforts to prevent investors from considering environmental and other factors in their decisions. They are running up against the trillions of dollars in investments committed to funds addressing such concerns.
The criticism focuses on the belief that Wall Street and investors are cutting off fossil-fuel producers from lending and investment. Republicans have also accused investors of trying to force companies to follow a liberal agenda at the expense of a pursuit of profit.
Investors still heavily finance oil and natural gas. They say the factors, including addressing climate change, improving corporate governance and encouraging diversity, boost profits.
ESG funds and climate investing are two of the fastest-growing parts of the investment industry. Globally, hundreds of new funds are added each quarter and they together hold some $2.5 trillion, a large portion of which is invested in U.S. companies, according to Morningstar.
Investors are paying nearly a record premium for shares of companies with the best ESG scores over the ones with the worst ratings, Bank of America Corp. analysts found. Surveys from the Index Industry Association, a trade group for index providers, and others show investors are making ESG more of a priority while snapping up green bonds and investing in climate startups.
ESG “is definitely the highest-growth part of the business,” Nasdaq Inc. Chief Executive Adena Friedman said on the company’s most recent earnings call. The exchange operator works with businesses on their strategies.
Companies have raised about $320 billion in green bonds and loans this year. They have borrowed $400 billion more in debt with incentives to hit sustainability targets, according to Dealogic. Startups developing everything from solar farms to clean hydrogen have privately raised $27 billion in equity, PitchBook data show. Market volatility and rising interest rates have pushed funding in these areas below last year’s record totals but they are still ahead of the clips from 2019 and 2020.
Driving the bets is a hunt for the next Tesla Inc. , falling costs that made renewable-energy projects competitive and concerns about flooding, wildfires, drought and storms that have been made worse by climate change. Clean-energy tax credits that are part of the new Inflation Reduction Act have added further incentives for investors in these areas.
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“If you look at where capital is going to be deployed, it’s going to be in renewable-energy technology and infrastructure,” said PJ Deschenes, a managing director at investment bank Nomura Holdings Inc. focused on the sector. “People are looking forward and seeing huge growth coming.”
He and others say that ESG investing, which is centered on mutual and exchange-traded funds that generally track the broader market, is a small part of a significant shift in the deployment of capital to address climate change. ESG is controversial because it is loosely defined and often head-scratching in its designations. It has been criticized by a range of investors and businesses and is under scrutiny by regulators.
Wall Street firms, including those facing boycotts from state governments, still lend billions to fossil-fuel producers, saying it is profitable and necessary. Debt financing for oil-and-gas companies is generally about the same size as green-bond funding, Dealogic data show. Some banks have said they are cutting lending to coal producers, and most have promised to gradually lower financing for other fossil fuels in the coming decades.
Some fossil-fuel producers are benefiting from ESG as they get credit for investing billions in clean energy through hydrogen, carbon capture and renewable fuels. As the Inflation Reduction Act made its way through Congress, Republicans pressured Exxon CEO Darren Woods and others who had praised incentives for those new lines of business to oppose the bill, highlighting tension between the Republican Party and the oil industry.
Critics of ESG say companies should focus only on maximizing returns for shareholders. Among the most prominent is “Woke, Inc.” author Vivek Ramaswamy, who launched an energy ETF that is nearly identical to a comparable BlackRock product in holding big fossil-fuel companies and some renewables. The distinction, he says, is he will push management to only focus on profits to provide an alternative to big asset managers that weigh ESG factors in those discussions.
“The key difference is the shareholder voice and vote,” he said. His firm’s ETF topped $300 million in assets in its first three weeks, a strong start for a new fund.
Shareholder proposals pushing back against company ESG initiatives and disclosures have gotten less support than proposals overall. Nearly 45 anti-ESG proposals were introduced at annual meetings for companies including Amazon.com Inc. and Walt Disney Co. between January and June, according to Morningstar. They received about 7% support, on average, compared with 30% for shareholder resolutions overall.
There is evidence that kicking banks out of their municipal-bond markets will end up hurting taxpayers. Academic studies have shown similar moves have decreased competition in local markets and pushed up borrowing costs. An assistant professor at the University of Pennsylvania’s Wharton School and a Federal Reserve economist recently estimated Texas entities paid several hundred million dollars in additional interest in the eight months after the state initially passed its anti-ESG law last year.
Texas’ Mr. Hegar and West Virginia state Treasurer Riley Moore said they aren’t worried, because other Wall Street firms with less restrictive approaches will step in to replace those they kicked out.
“I’m not the distortion in the marketplace,” Mr. Moore said. “They are.”
Write to Amrith Ramkumar at email@example.com
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