Posturing of Republican States Adds to Planetary Risks
My last post used property insurance to illustrate how climate change is already intruding on our day-to-day lives. When I started that post, I had the vague idea that this might be causing some softening of attitudes, even in Red states. Talk about misbegotten hopes!
Rather, the impact of these states pretending environmental threats are not man-made has a greater rippling effect than I anticipated.
Killing the Messenger (for Gain)
The leading edge of the Republican approach is “anti-ESG” legislation. More than 15 states, all of them Republican dominated, have enacted such legislation. As most of you know, ESG stands for Environmental-Social-Governance. While ESG evaluations apply to all business practices, it has a special meaning for investors. Investors should take into account the impact in these domains of the investments, the business risks associated with these factors, and the degree to which reporting on both the impacts and risks is clear and explicit. Anti-ESG legislation seeks to blunt this, typically in one or both of two forms. One is to prohibit use of any “social, political or ideological interests” when making investment decisions. The other is to prohibit the state from using any institution that is “boycotting” categories of investments such as fossil fuel or gun manufacturing.
Anti-ESG laws blossomed after many large financial institutions joined the Climate Action 100+ group following the Glasglow 2021 Climate Change Conference that documented the extent of environmental risks. These investor institutions agreed to exert pressure on an identified group of climate-critical corporations to take sufficient steps to reduce the risk of environmental disaster.
As it turns out, administering these anti-ESG laws is more ideological than any commitments made by the financial institutions themselves. Texas, Oklahoma, and several other states maintain a list of institutions that cannot do business with the state because of their alleged stance on environmental issues. But how institutions get put on these lists is unclear. In March of last year, Texas added HSBC bank to this list saying that it “threatens Texas jobs, our state economy and our national security.” HSBC contends that all it doing is maintaining “a balanced approach in the implementation of its net zero commitment, with the primary aim being to support our customers in the transition from a high-carbon to a low-carbon economy.” Apparently, having a commitment to achieving a low carbon economy is sufficient reason for Texas and other states to avoid doing business with you.
Ironically, these laws, which use the rhetoric of making financial decisions based solely on “pecuniary factors,” probably have an adverse economic impact on the citizens of these states. A study from Wharton noted that when Texas’ law was announced, five of the state’s largest underwriters of municipal bonds exited the state. As a result, the researchers estimated that Texas cities will pay an additional $303 million to $532 million on subsequent bond issues because of the loss of competition.
The obduracy of these states is not limited to the laws they have passed in their own states. At least 25 Republican-led states have joined major business groups in litigation to block the SEC from issuing rules that require some degree of transparency about environmental issues. These rules would require, among other things, those issuing stocks or bonds to recognize any environmental risks relevant to their line of business and to disclose in notes to their financial statements the costs incurred by severe weather events and other conditions such as rising sea levels or extreme temperatures.
At some level, it is possible to recognize that the economies of major Republican states are more dependent on industries causing climate damage, particularly fossil fuel industries — and they are therefore more protective of them. However, the extreme hostility to these measures goes too far. Perhaps there could be excesses in using ESG criteria. But the risks from environmental factors are not reduced by refusing to acknowledge them. To be unwilling to concede that even requiring disclosure around issues that have the potential to do enormous damage to everything in their state. or that any institution that is committed to helping the transition to a less toxic energy economy is inimical to the interests of the state is absurd. And, indeed, is an abrogation of these states’ responsibilities to look out for the longer-term welfare of the citizens of their states.
Whatever else is part of the motivation, this deeply irresponsible behavior highlights two key pillars of the GOP’s peculiar approach to politics: culture wars and crony capitalism. Culture war because concerns about environmental threats can be readily portrayed as another example of Democrats looking for pretenses to take away” your freedom”. Crony capitalism because these measures curry the favor of those in the fossil fuel industry, who return the favor with bounteous campaign contributions.
Rippling Effects Undercut Entire Effort
This wave of anti-ESG legislation has contributed to making financial institutions much less willing to take a public stand on environmental issues. In the last few months, at least five major investor institutions have exited the Climate Action 100+ group.
All of which illustrates how difficult the transition to more sustainable world is going to be. The financial institutions are facing dual threats in the way this is unfolding. On the one hand, they are punished for taking a stand on environmental issues. But sticking to this stand has its own punishment because the rest of the world is not following any of the climate-saving models that have been laid out in recent years. We are not on a track for a 1.5C temperature increase; in fact, we are likely blasting through a 2.0C increase. Thus, financial institutions that predicated their business on the idea that those models were guiding business decisions are finding a shortage of clients who are heeding the models. And the supply of clients still running their businesses as if nothing has changed are plentiful.
I suppose it is fair to blame the financial institutions for not showing more fortitude given the longer run implications of climate change. However. I think it more important to focus on the fact that climate change requires pretty much everybody to jump together, all at once. If we’re all waiting for the next guy to take the big step, we’ll all be waiting when the water is swirling over our boots.
There is not going to be a transition to a more sustainable economy without significant participation of private capital. But until the rest of the economy decides it has to commit itself to that direction, it is unrealistic to believe private capital could lever all those changes, let alone be willing to so. I don’t see how this works without the clear policy directions that create the conditions by which the economy feels itself compelled to adopt a different energy mode and, thus, creates the demand for financial institutions to finance this transition.
Conversely, as long as there are substantial financial returns from investing in companies who are not acting with an eye to longer run implications, some investors will make those investments — and corporations will continue to take on environmentally damaging projects.
Republicans are right in saying that ESG rules are interfering with the market. But they say that like invoking “the market” is a Get-Out-of-Jail card for whatever it produces. I can’t imagine we really want a pure market approach to dealing with the environment. The result will be to continue investing regardless of the impact until such time as the profitability disappears. But immediate “profitability” doesn’t take into account long run damage or damage offloaded “somewhere else”. (What economists call “externalities” because they are external to the micro-economic calculations about profit, and therefore don’t enter into the discussion.) We will be cleaning up the mess left behind for decades after the profitability disappears — if we are even able to.
When Florida passes legislation that says any state investment decisions can be made solely with regard to “pecuniary factors”, presumably what they are demanding is the state not consider the long run implications in their decisions…only the short run return. So, sure, go full bore on fossil fuels as long as there is oil. What happens to the next generation is the problem of some different politicians.
Thus, the greatest danger from anti-ESG legislation is that it is destroys the unanimity which will be necessary to make progress on saving the world at sufficient scale — citizen support for the alignment of private capital with government policy. Achieving this will require political bravery and a willingness to put real limits on sectors of the economy. It will not be without pain, perhaps considerable pain. But it is inexcusably feckless to give primacy to the immediate political and economic concerns without taking into account that the U.S. just endured the hottest winter on record, which included, according to Yale’s Climate Connections blog, the largest recorded wildfire in the history of Texas. In the rest of the world, last month, the Great Barrier Reef, the largest living structure on Earth, was hit by the fifth wave of mass bleaching in the past eight years and worse yet is forecast for the coming year. Or that the heat index in Rio topped a hundred- and forty-four-degrees Fahrenheit. Every month since June has been the hottest month ever recorded.
To brush off the accumulation of these events and their consequences as “ideological” is intellectually sloppy and fundamentally dishonest.
In the face of this reality, maybe it wouldn’t be too much for Republicans to at least refrain from throwing monkey-wrenches into attempts to solve these problems. Just how great is the threat to the wellbeing of Texas from a bank signing on to reduce the causes of climate change?
