Wall Street hits back at GOP in ESG war

Wall Street giants are defending a widespread initiative to invest in companies with environmentally friendly policies, moving away from investment in the fossil fuel industry following attacks on the practice from GOP leaders.  

Asset management giant BlackRock wrote a letter to GOP states that are trying to curtail a social movement in the financial sector known as Environmental and Social Corporate Governance (ESG), which seeks to move the U.S. economy away from the fossil fuels that contribute to global temperature rise. 

Nineteen attorneys general, from mostly Republican-led states, penned a letter to BlackRock in August inquiring about its investment practices.  

The attorneys general said BlackRock is pursuing a political agenda instead of investing solely for the purpose of getting the best return on the company’s investments. 

“Rather than being a spectator betting on the game, Blackrock appears to have put on a quarterback jersey and actively taken the field,” they wrote. “Blackrock took voting action against 53 companies on climate issues, with 191 companies put on watch.” 

“While couched in language about long-term value, Blackrock’s alignment of engagement priorities with environmental and social goals … suggests at minimum a mixed motive,” they wrote. 

The firm responded that it favors companies that support the transition away from fossil fuels not because it’s pursuing a political agenda, but because these companies are a better long-term investment. 

“We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes,” BlackRock said in a letter addressed to the attorneys general. 

The company said that the attorneys general were wrong about why BlackRock was participating in various ESG initiatives. 

“In managing our clients’ assets, BlackRock seeks to realize the best long-term financial results consistent with each client’s investment guidelines,” the company said. 

Arizona Attorney General Mark Brnovich said in a statement to The Hill that Blackrock’s response was “disappointing.”

“The response was disappointing, to say the least. It’s sad that some groups are more interested in pushing a far-left agenda than protecting Americans from skyrocketing energy costs,” he said.

The Texas state Senate also sent BlackRock a letter in August requesting documents about its ESG practices, which many in the state view as harmful to its economy. About a third of Texas GDP comes from the oil and gas sector. 

BlackRock CEO Larry Fink hasn’t shied away from the sociological side of the debate, and has argued repeatedly that capitalism has the ability to shape societies. 

BlackRock aside, other voices in corporate America are expressing anxiety about the ire the strategy has drawn from state governments.  

“How will these legislative trends affect the difficult corporate balancing act?” Cydney Posner, a lawyer in the public companies group of the law firm Cooley LLP, wrote in a Thursday blog post for the Harvard Law School Forum on Corporate Governance. 

“As if it weren’t hard enough for companies to figure out whether and how to respond to social crises, now, another potent ingredient has been stirred into the mix: the actions of state and local governments — wielding the levers of government — to enact legislation or take executive action that targets companies that express public positions on sociopolitical issues or conduct their businesses in a manner disfavored by the government in power,” she wrote. 

Treasury Secretary Janet Yellen criticized long-standing assumptions about the relationship between government and big business in remarks delivered Thursday in Detroit. 

“The traditional approach to supply-side economics — which focuses on providing tax incentives to owners of capital in order to boost private investment — has, in many cases, contributed to deepening income and wealth disparities,” she said in her remarks. 

As an alternative, Yellen touted “the modern supply-side agenda” as “concerned with a broad range of productivity-boosting investments and with a broad distribution across sectors, people and places.” 

As an example, she cited new investments in a technology program from the Department of Commerce. 

“To spur regional economic development, the Commerce Department will establish at least 20 regional technology and innovation hubs. They will be geographically dispersed with priority for underserved and underrepresented communities. Such dispersal of economic opportunity across the country will mean good, new jobs in industries of the future,” she said. 

Her remarks built off a speech she delivered at the World Economic Forum in January, in which she advanced positions more often associated with the economic policies of the post-World War II period than the past several decades, which have seen trends toward globalization, financialization and deregulation in the private sector. 

“Our new approach is far more promising than the old supply side economics, which I see as having been a failed strategy for increasing growth,” she said. 

“Significant tax cuts on capital have not achieved their promised gains. And deregulation has a similarly poor track record in general and with respect to environmental policies — especially so with respect to curbing [greenhouse gas] emissions. Moreover, this approach has deepened disparities in income and wealth by shifting the burden of taxation away from capital and towards labor,” she said. 

Democrats’ recently passed Inflation Reduction Act enacted significant changes to U.S. tax and environmental policies in line with this agenda, including a 15 percent minimum tax on book income for large U.S. corporations and a tax on stock buybacks, as well as various measures to reduce U.S. carbon emissions. 

The legislation did little to increase taxes on wealthy taxpayers, despite numerous proposals including a tax on capital gains and a minimum income tax for billionaires. 

Republican strategists are not happy about the new policies or about Yellen’s ambitious language on potential new direction in the U.S. economy. 

“It’s beyond belief. Did she sleep through the Reagan years? Did she not compare the Reagan years to the Carter years? What does she think a tax on capital actually is?” longtime Republican anti-tax advocate Grover Norquist said in an interview. 

“When she pooh-poohs deregulation, she’s being a bad economist,” he said. “Look at the deregulation of the transportation sector under Reagan, which actually started under Carter, although Reagan gets most of the credit for it. That was a bipartisan success that brought prices for consumers way down.” 

Despite the new law and Yellen’s programmatic speech, economists are skeptical that the relationship between government and big business is fundamentally changing. 

University of Massachusetts economist Gerald Epstein suggested that if politicians don’t think social and environmental policies should be advanced by corporate boards, then the well-established practice of corporate lobbying on public legislation should be reconsidered as well. 

“If board rooms shouldn’t discuss these issues, should their companies be allowed to spend millions of dollars lobbying on public policy issues?” he said in an email to The Hill. 

This story was updated at 3:11 p.m.