The Great ESG Retreat

The first veto of Joe Biden’s presidency, in March 2023, came on a bill that would have overturned a Department of Labor rule allowing retirement funds to consider environment, social, and governance factors — commonly known as ESG — when making investment decisions. At the time, it seemed like a good representation of where the issue stood: Though there was a conservative backlash against ESG investing, much of which revolves around whether companies are incorporating climate risks into their planning, the backlash was more bark than bite. ESG not only seemed here to stay, it was gaining in prominence as more investors and Wall Street firms realized they could no longer ignore the effects of climate change on the economic prospects of the companies they were funding.

Less than two years later, the picture looks rather different — at least politically. There is still over $3 trillion invested in ESG funds worldwide, the vast majority of it in Europe. But here in the U.S., the backlash has only grown stronger, and with Donald Trump’s election, there has been a Wall Street stampede away from public commitments to assess climate risk as a key component of investment decisions. There’s no way to know how much long-term effect this change will have on emissions, but the reversal in the public stance of the financial sector has been swift and intense.

Let’s begin with the banks. In the space of a month, the six largest banks in the United States — Goldman Sachs, Bank of America, Wells Fargo, Citi, Morgan Stanley, and JPMorgan — all pulled out of the Net-Zero Banking Alliance, an international United Nations-sponsored group under which member banks commit to pursuing net-zero carbon emissions from their lending and investments by 2050.

While Trump’s election may have been the tipping point, it comes after an organized campaign waged at the state level over the past couple of years, as Republican attorneys general have pressured and threatened the finance industry into abandoning its efforts to contribute to the mitigation of climate change.

In the spring of 2023, 23 Republican AGs threatened the Net-Zero Insurance Alliance (like the NZBA, a UN-sponsored group) with antitrust action, saying it was pursuing “an activist climate agenda.” Companies began leaving, and a year later, the group disbanded. The effort against the banking alliance followed a similar pattern: Threats of legal action from Republican attorneys general, followed by a pullback from the banks.

Like insurance companies and banks, investment firms are clearly feeling the pressure. BlackRock, the largest asset manager in the world, recently pulled out of the Net-Zero Asset Managers Initiative, a group similar to those for insurers and banks, citing “legal inquiries from various public officials.” That included a lawsuit filed by Texas and 10 other Republican states, alleging that BlackRock and other firms were unfairly harming the fossil fuel industry with their investment decisions. This week, the NZAMI released a statement saying that in response to “different regulatory and client expectations,” it is launching an internal review, and meanwhile “suspending activities to track signatory implementation and reporting” of climate goals.

Meanwhile, Republicans in Congress have been issuing reports and press releases condemning the “woke ESG cartel,” which they claim consists of “left-wing activists and major financial institutions that collude to impose radical environmental, social, and governance goals on American companies.” After the election, those Republicans now control both houses of Congress, as well as the White House.

So it’s a good bet that the pressure on the finance industry from Washington will only increase, especially with a new administration that combines dismissal of climate change with an eagerness to bring corporations to heel. In many cases, key administration positions will be staffed by former employees of the very fossil fuel companies that oppose real climate action, or at least by their allies. One vivid example: Lee Zeldin, Trump’s nominee to lead the Environmental Protection Agency, revealed in disclosure forms that he was paid tens of thousands of dollars to pen op-eds attacking ESG investing. His forms list only the PR firms that paid him, not the clients on whose behalf they did so.

These pullbacks from climate pledges are clearly motivated by fear, and may even be taken with regret by some of the CEOs making the decisions. If that is the case, however, it is not a universal sentiment. The Financial Times reports that “Some Wall Streeters also feel able to embrace making money openly, without nodding to any broader social goals. ‘Most of us don’t have to kiss ass because, like Trump, we love America and capitalism,’ one said.”

Here’s the kicker: These alliances that are now wavering began with few requirements in order to bring in as many participants as possible; only later would companies have to meet more reporting and emissions goals. But “as accountability mechanisms started to come into play, at the same time we started to see the conservative backlash against it,” Tensie Whelan, founding director of the NYU Stern Center for Sustainable Business, told me. Now, “they’re all running scared.”

Though some critics charge that ESG is mostly about greenwashing, many financial actors — banks, asset managers, investors — have embraced greener investing because it is both good for the planet and good for business. If a company is exposed to climate risk but fails to account for it in its long-term strategy, that company is probably a bad investment. Investments incorporating sustainability considerations tend to perform as well or better than ordinary investment vehicles — the S&P 500 ESG Index, for instance, has outperformed the standard S&P 500. And a study by HIP Investor showed that public pension funds in blue states that incorporated ESG factors have generated higher returns than red-state funds that eschewed them.

“I would hope and assume that at some point there will be some class-action suits” against states that have turned away from ESG investing, and in so doing cost taxpayers money, Whelan said. In 2024, 17 Republican-run states passed bills restricting ESG investments with state funds, while eight Democratic states passed pro-ESG bills.

When banks or investment firms abandon climate alliances or pull back from climate goals in other ways, they nearly always put out statements reiterating their commitment to reducing emissions. While those might be sincere, the most important message is that the threats and pressure are effective. And that’s what has become so clear: Conservatives are energized and emboldened to roll back corporate efforts to address climate change, and are using every tool they have — legislation, litigation, threats, public pressure campaigns — to destroy those initiatives.

Nevertheless, there is plenty of room for pressure from the other side. Whelan notes that blue states “are very adamant about having key sustainability criteria” in their investments, and as younger generations accumulate more wealth, they are more likely to demand sustainability where they put their money. As for Wall Street responding to political pressure by backing away from its climate goals, “this retrenchment is unfortunate,” Whelan told me, but “I do think it’s temporary, and I think they know that. Because they’re not stupid.”