By Michael R. Bloomberg / Bloomberg Opinion
Republican elected officials seem to think they’ve found three new evil letters to pair with their favorite bugaboo, CRT, or critical race theory. This one is called ESG, which refers to investment strategies that consider environmental, social and governance issues. Critics call it “woke capitalism.”
There’s just one problem: They don’t seem to understand capitalism. And flogging ESG is not only a terrible economic mistake. It will be a political loser, too.
Republican critics of ESG have focused primarily on the “E,” arguing that climate change should not factor into investment decisions. Texas has adopted a law restricting the state, localities, and pension boards from doing business with financial firms that seek to limit their exposure to fossil fuel companies. Even firms that have large investments in fossil fuels are being banned, if they dare attempt to price climate risk into their portfolio allocations. Oklahoma has enacted a similar law, and other Republican leaders are moving in the same direction. Last month, Florida’s Republican governor, Ron DeSantis, supported a resolution barring pension fund managers from considering ESG factors.
All these anti-ESG crusaders position themselves as defenders of the free market. But they are attempting to use government to block private firms from acting in the best interests of their clients, including retired police officers, teachers and many others who depend upon public pensions. And in doing so, they are turning the most basic investment rules on their head.
Any responsible money manager, especially one with a fiduciary duty to taxpayers, seeks to build a diversified portfolio (including on energy); identifies and mitigates risk (including the risks associated with climate change); and considers macro trends that are shaping industries and markets (such as the steadily declining price of clean power).
That’s investing 101, and either Republican critics of ESG don’t understand it, or they are catering to the interests of fossil fuel companies. It may well be both. Either way, they are standing in the way of the most powerful force we can muster in the fight against climate change: the private sector. And the stakes could not be higher.
Every day brings new stories of climate-related extreme weather wreaking havoc on communities across the country and around the world. Drought conditions are so bad in some places that receding water levels are revealing everything from ghost towns and Nazi-era war boats to Neolithic monuments and dinosaur tracks. Rivers like the Danube are running dry and struggling to carry freight, worsening the world’s supply chain problems.
In other places, floods have forced people from their homes, killing more than three dozen in Kentucky last month and leaving much of Jackson, Miss., without drinking water. In Pakistan, floods have killed more than 1,100 people. Death and destruction from record-setting heat waves and wildfires have been no less severe.
The American people know that climate change is real, and as polls consistently show, large majorities want to tackle it, and not just through government action. A poll last year found that two-thirds of investors support their retirement funds offering ESG options. There is also strong support among investors for greater transparency of carbon emissions, and for good reason.
In a world rapidly moving to clean energy, companies that are dependent on fossil fuels put investors at greater risk. Financial firms, and increasingly individual investors, want to know what those risks are, so they can factor that information into their capital allocation decisions.
An effort I help lead, called the Task Force on Climate-Related Financial Disclosures, has enlisted thousands of firms that have voluntarily agreed to provide data about their emissions and exposure to climate risks, such as supply chain disruptions. These and other firms want to be able to price climate risk into their investment decisions, and without accurate and reliable data, they can’t do that.
Given this market-driven demand for data, and strong bipartisan public support for climate action, the Securities and Exchange Commission is in the process of adopting reporting requirements that build on the framework we created, as other nations have also done.
The fact is: Climate risk is financial risk. Costs from climate-related weather events now exceed $100 billion annually; and that is only counting insured losses. Accounting for these and other losses isn’t social policy. It’s smart investing. And refusing to allow firms to do it comes with a big cost to taxpayers.
A recent study of Texas’s anti-ESG law found that its taxpayers could pay an extra $532 million in interest on borrowing costs, just based on the first eight months of 2022 alone. That’s hardly surprising: When states limit the supply of firms that are eligible to finance their debt and manage their pensions, the remaining firms can charge higher rates and extract higher fees.
Of course, we will all pay far larger costs if we continue to allow elected officials to block the private sector from acting on climate change. The good news is that the next generation of Republican leaders seems to understand that the market has a crucial role to play. According to recent polling, three-quarters of Republicans aged 18-39 believe the nation should be doing more to prioritize clean energy, including passing a carbon tax.
Hopefully, their elders in office will get the message soon. Until then, maybe we should send them all to a financial literacy class. Or, better: send them on a cruise down the Danube.
Michael R. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, U.N. special envoy on climate ambition and solutions, and chair of the Defense Innovation Board.
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