The US fight over ethical finance

The anti-ESG movement in the U.S. has gained significant momentum, particularly during the 2023 and 2024 proxy voting seasons. According to recent reports, such as those by Harvard Business Review and Responsible Investor, the movement has been marked by an increased number of shareholder proposals targeting ESG issues, with many of these proposals being actively opposed by anti-ESG factions. This opposition is not only concentrated in shareholder meetings but has also manifested in legislative actions and public campaigns against ESG principles.

Efforts to counter ESG investments have been particularly visible in the legislative arena. For instance, New Hampshire Republicans have proposed extreme measures, including the possibility of prison sentences from 1 to 20 years, for asset managers who prioritise ESG factors in their investments. This proposal is part of a wider pattern where state legislators are introducing bills to restrict or penalise ESG-focused investments. Moreover, efforts to combat ESG have not been limited to legislative proposals. Influential political figures and organisations have been actively working to discredit ESG practices.

The backlash against ESG has led to several notable boycotts targeting asset managers who embrace sustainable finance. These boycotts are frequently initiated by political activists and organisations opposed to ESG policies. For example, groups have mobilised against firms that have divested from fossil fuels or adopted social justice-oriented investment strategies. These campaigns argue that such practices align too closely with political agendas or harm certain industries, contributing to their popularity among anti-ESG activists.

In March 2024, the SEC finalised rules to standardise climate-related disclosures for public companies but significantly scaled back the proposal by excluding the contentious Scope 3 GHG emissions reporting. Instead, the rules require phased disclosure of Scope 1 and Scope 2 emissions for large and accelerated filers only when material. This reduction in the SEC’s climate disclosure rule disappointed both pro-ESG and anti-ESG advocates. Pro-ESG supporters expressed concern over the lack of a requirement for Scope 3 emissions, while anti-ESG proponents criticised the very existence of a climate-related rule.

After the rules were adopted in 2024, several lawsuits from anti-ESG petitioners were filed prompting the SEC to delay enforcement pending judicial review. One of these anti-ESG petitioners is the well-known, albeit controversial, “National Center for Public Policy Research” (NCPPR). In 2023, at DPAM, we observed that this proponent exclusively submits anti-ESG proposals to be voted at General meetings of some U.S. companies. Notably, in the case of Visa Inc, the NCPPR submitted a proposal which aims to separate the CEO and Chairman roles, which, at first glance, seems in line with governance best practice. Nevertheless, we withheld our support for the proposal as it became apparent that the proponent was orchestrating a broader campaign against Visa's CEO with ulterior motives. This included urging Visa Inc to retract its endorsement of Black Lives Matter. NCPPR also called for the cessation of health insurance coverage for transgender employees, among other actions.

The petitioners like the NCPPR claim the SEC exceeded its authority, arguing that the rules impose a new regulatory regime focused solely on climate change, violating the First Amendment and bypassing Congressional approval. They argue that the SEC’s mandate focuses excessively on non-financial climate disclosures, which they view as unrelated to investor protection.

The SEC counters that it acted within its statutory authority, designed to protect investors by requiring the disclosure of material risks, including climate risks. The agency highlights that its historical authority allows it to mandate disclosures beyond financial data when relevant to investors. The SEC maintains that climate-related risks can impact financial performance, making the rules vital for transparency and consistent reporting.

Despite the backlash against ESG investing, there remains strong and ongoing commitment to responsible investment, including in the US. While media coverage often highlights political opposition to ESG in the US, PRI data shows that many organisations continue to adhere to these principles. The PRI is still attracting new signatories, with climate change and diversity, equity, and inclusion (DEI) being key ESG priorities, especially for US signatories. North American signatories are making progress in their ESG practices, although they generally make fewer public disclosures on responsible investment compared to those in Europe, Oceania, and Asia. For example, the percentage of North American signatories identifying sustainability outcomes increased from 58% in 2021 to 71% in 2023.

Learn more about the drivers behind the anti-ESG movement in the second part of this article: 'Why is the US pushing back on ESG?'