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ESG sentiment

Anti-ESG sentiment in the US weakens ESG markets

  • Anti-ESG sentiment has been rising in the US, owing to a pushback against it in Republican states. This is likely to dent the rebound in sustainable finance in the US. The outcome of the 2024 election will determine if the pushback will have a deep, lasting effect. 
  • Although several states have pulled out their assets from Blackrock, the fund manager’s state assets of Texas and Florida make up a small amount of its total assets under management. Municipal bond underwriters have also been in the centre of the anti-ESG backlash. 
  • Data from the first quarter of 2023 shows that ESG bond issuance in the US dropped considerably compared to the first quarter of 2022. Republican states such as Texas and Florida have been paying out higher yields after banning municipal bond underwriters such as JPMorgan and Citibank. 
  • This is likely to increase the tax burden in these states, given that they also have huge debts. If the backlash persists, it may even cause a downgrade in the states’ debt ratings.

The rebound in sustainable finance will face a deterrent in the form of ongoing political backlash in the US regarding ESG. A few US states have announced that they will pull out state assets managed by Blackrock, as they deem Blackrock to be advancing ESG goals. Municipal bond underwriters like JPMorgan and Citigroup have also faced backlash. According to Morningstar, anti-ESG sentiment, coupled with rising interest rates have resulted in a pullback of $US5.2bn from sustainable funds in the first quarter of 2023, making it the third quarter of continuous withdrawal in a year. Whether or not this backlash will continue depends on the outcome of the 2024 election.

Anti-ESG sentiment has been fuelling anti-ESG legislation

Florida’s Senate approved a bill banning state and local governments from using environmental, social, governance criteria when selling debt or investing public money in April 2023. It also prohibits Florida municipalities from selling bonds related to ESG projects and bans seeking ESG ratings. In March 2023, Mr DeSantis formed an alliance in March 2023 with 18 other US states (Alabama, Alaska, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, Virginia and Wyoming) to pushback against the The Department of Labor’s new rule allowing climate-aligned funds in 401(k) plans, passed in 2022. Florida also withdrew back US$2bn in state assets that had been managed by BlackRock (announced in December 2022) . However, Blackrock still manages US$12.9bn for the state’s retirement funds after the pullout, implying that not a lot of the state’s money was put into ESG by Blackrock. 

In Texas, a bill prohibiting ESG investing in the state’s public retirement investment system is currently under debate and The Teacher Retirement System of Texas sold all its shares in Blackrock by the end of 2022, as under Texas law, Blackrock is deemed a company that has “boycotted” the fossil fuel industry. Texas legislation passed in 2021 that bans the Texas municipalities from working with banks that limit business with firearms as well as energy industries has affected Citigroup, JP Morgan Chase and Goldman Sachs, all of which are major underwriters of municipal bonds. In January 2023, Kentucky placed Blackrock, JPMorgan and Citigroup on a divestment list citing reasons of fossil fuel boycott by these entities. Arizona has divested more than US$543m from BlackRock money market funds in 2022, while Louisiana, Missouri, Arkansas, Utah and West Virginia have pulled out US$794m, US$500mn, US$125mn, US$100mn and US$22mn respectively. West Virginia announced in July 2022 that it would no longer give state business to banks such as Goldman Sachs and JP Morgan Chase citing harm to the state’s economy due to lack of financing for coal companies.

Pull-back of assets from Blackrock will not affect Blackrock significantly, but ESG bond issuance and the greenium has fallen in the US

When it comes to asset management, despite all the criticism of Republican states against Blackrock, the firm only accounts for a small portion of asset management for states like Texas and Florida. Blackrock manages around 5.1% of Texas’ assets, while for Florida, it is 2.46% of its total assets. As a result, Blackrock itself is unlikely to be affected on a large scale. 

However, the pushback against ESG investing has been felt in the ESG finance markets. According to Bloomberg, ESG debt made up only 2.5% of US$248bn of bonds issued by US companies in the first quarter of 2023, as opposed to 6.08% of US$209bn of bonds issued in last year’s first quarter. Owing to this backlash, it is likely that greeniums will eventually diminish on US ESG debt, as demand for ESG bonds will go down significantly. A study by Goldman Sachs shows that in June 2022, the greenium for ESG-focused, US dollar-denominated high-grade portfolios was around 0.6%. By November 2022, the greenium had almost disappeared. Asset managers of public money will now have to show that buying a bond is also addressing non-ESG goals, essentially reducing greenwashing, at least when it comes to public funds.

Tax burdens and a downgrade in state debt might be on the horizon 

Republican states that have introduced policies against municipal bond underwriters have been paying more yields than Democrat states such as California. For example, according to Bloomberg, Texas is paying 19 basis points more in yields compared to California, while Florida is paying 43 basis points more. Also, the fact that the number of municipal bond underwriters have been declining since 2013 may further exacerbate the problem, as this reduces competition among the underwriters and in turn, pushes up interest rates.

The rise in interest rates will increase the tax burden, especially for Texas and Florida, which have substantial debts. Texas has a debt of US$51bn, while Florida has a debt of US$29bn. A downgrade of credit ratings is also possible if more anti-ESG legislation is introduced. Currently, Texas and Florida debts are rated AAA, which could likely be downgraded if more anti-ESG legislation is introduced, especially in the sphere of municipal bond underwriting.

A lot depends on the outcome of the 2024 election

The Republican dominated House of Representatives voted to strike down the Department of Labour’s rule that allows Employee Retirement Income Security Act’s (ERISA) retirement plan fiduciaries to consider environmental, social, and governance (ESG) factors when making investments. However, Biden used his first veto in March 2023 to retain the rule. Whether or not anti-ESG measures will appear at the national level will depend on the 2024 election. In the 2024 elections, the full 435-seat House of Representatives and one-third of the 100-seat Senate will be up for election. Currently, Republicans have a slim majority in the House of Representatives, while the Democrats have a slim majority in the Senate. A clear Democratic or Republican majority in both the houses after the elections will give greater clarity on the future of ESG in the US. However, if the narrow majority margins in the two houses persist after the 2024 elections, ESG will continue to be the centre of a big political divide.

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