The once obscure financial term is now at the center of the Republican anti-revival crusade.

On Monday, President Biden released first veto his presidency on a measure that would repeal the Department of Labor rule that allows pension fund managers to consider environmental and social impacts in investment decisions. The strategy is more commonly known as ESG: reducing the environmental, social and governance criteria that investors can use to evaluate companies whose shares should be bought.

The vetoed resolution, led by Congressional Republicans, is the latest in a series of attacks on what GOP lawmakers are calling “awakened capitalism.” From 2021 Florida, Texas, LouisianaSouth Carolina and several other red states pulled billions of public funds from BlackRock and other ESG-backed investment companies. At least seven Republican-controlled states adopted policy and 13 others introduced bills to prohibit the application of ESG principles in public investments such as public pensions.

The rancor is likely to continue until the 2024 presidential election. Republican candidates Governor of Florida Ron DeSantisformer vice president Mike Penceand the “anti-awake” entrepreneur Vivek Ramaswami all have taken a prominent stand against ESG.

ESG has also come under fire from progressives who accuse firms of self-reporting ESG data. green wash. But despite all the political controversy, ESG is quite popular among the people who actually use this strategy: investors.

A 2021 survey fund manager Natixis found that 72% of institutional investors are adopting ESG. Companies are responding to investor interest: about 90% of companies share some ESG data with shareholders. recent poll leaders of large public companies in the United States. As of early 2022 $8.4 trillion in the US, the assets were owned by financial firms that use ESG solutions.

Perhaps most tellingly, BlackRock CEO Larry Fink has promoted the importance of ESG standards in his annual letter to CEOs With 2017 – a particular object of discontent of the Republicans. The annual report of the world’s largest wealth manager has a big impact on corporate executives and investors.

Kirsten Snow Spaulding, vice president of the Ceres Investor Network, leads the network over 220 financial institutions manages over $60 trillion in assets. She says the vast majority of investors she works with consider ESG integration to be just common sense.

“You are meeting with these analysts, right? They’re not crazy progressive, you know. These are really big people who are doing their job well,” she said.

In fact, ESG has been uncontroversial among investors since the beginning, in part because the term was coined with investors. The acronym first appeared in report for 2004 jointly developed by the United Nations Global Compact, a voluntary corporate sustainability initiative, and a group of 23 major financial institutions. The members are Goldman Sachs, HSBC, Credit Suisse and Morgan Stanley, just to name a few – not exactly what comes to mind when you think of radical liberals.

One of the reasons for the recognition of ESG among investors is its clear alignment with the traditional goal of investing – profit maximization. While the original 2004 report paid lip service to the social case for sustainability, the report’s authors focused more on the business case for addressing ESG risks. argues Elizabeth Pollman is a professor at the Cary School of Law at the University of Pennsylvania.

In theory, investors apply the ESG criteria because they recognize that environmental and social impacts, such as climate change, will significantly impact a company’s bottom line in the long term. According to Spaulding, ESG data and risk testing is how “we ensure that investors can work through the capital markets to create long-term wealth for people.” But in practice, data is mixed on whether or not using ESG criteria really maximizes returns.

The difficulty in evaluating ESG lies in the lack of a standardized definition of the term. According to sustainable finance expert and Yale professor Carey Krosinski, one of the biggest misconceptions about ESG is that it’s a unique idea – a ready-to-use adjective that we can put in front of any financial term we think is appropriate, for example, investing in ESG or ESG firms. But ESG is not a fixed technical concept. It’s more like an umbrella, bringing together three separate but related sets of questions.

The expansiveness of ESG is one of the reasons for its success. Various actors, from asset managers to companies and insurance companies, are shaping the definition, methodology and application of ESG to best suit their individual needs. Gabriel Toomey, CEO of ESG integration consultancy Responsible Alpha, compares ESG to a bakery where “various breads, donuts and pastries come from this bakery.”

For example, there is over 600 ESG-rated companies, which companies evaluate based on their environmental, labor and management practices. Everyone uses their own methodology and as a result they tend to give different ratings. Investors can also buy products called ESG funds, which pool shares of tens to thousands of companies according to ESG ratings and other environmental and social indicators.

Critics say ESG funds and their underlying ratings misleading statements about their social and environmental impacts and are distracted from the more urgent work of climate regulation. A Bloomberg’s analysis the world’s largest ESG valuation firm, MSCI, found that the firm only measured risks for companiesrather than environmental and social risks to society. “Tackling climate risk in financial portfolios is not the same as tackling climate change itself.” wrote Tariq Fancy, renowned ESG critic and former CIO of sustainable investments at BlackRock.

“Green investing actively harms because it influences public opinion and reduces the likelihood of regulation,” he said. said New Republic.

On the right end of the spectrum, legislators in red states from Florida to Texas argue that the inclusion of ESG restrictions generates income for retirees. But while the facts say otherwise. A financial analysis by the Kansas State Budget Office found that pending legislation against ESG reduce pension contributions by $3.6 billion over the next decade. In Indiana, the losses will be $6.7 billion for the same period of time. And in Texas, researchers found that a recently passed anti-ESG law cost taxpayers roughly from $302 million to $532 million interest for eight months.

“If you limit the pool of available asset managers, it is very costly for taxpayers and retirees,” Spaulding said. As for whose interests such policies serve, “it’s definitely not retirees or taxpayers in these states,” Spaulding said.

Some political scientists argue that the onslaught against the ESG is just a carefully planned attempt to please the Republicans. donors. At the heart of the problem is the perceived threat that ESG poses to the oil and gas industry. It seems that the more companies and investors recognize the need to move away from fossil fuels, the more ESG opponents are stepping up efforts to protect the oil and gas sector – a huge source of lobbying for money for the Republican Party.

Millions to fund the anti-ESG movement were traced back wealthy conservative sponsors. The Wall Street Journal reports that a right-wing nonprofit organization led by Leonard Leo, leader of the conservative Federalist Society, spent more than 10 million dollars for anti-ESG activity. And large right-wing groups, including the Heritage Foundation and the American Legislative Exchange Council, better known as ALEC, have played a leading role in pushing model legislation against ESG.

However, as efforts to overthrow ESG are accumulating, this strategy is increasingly being codified in domestic and international norms. Last March, the Securities and Exchange Commission, the federal agency that regulates publicly traded companies, issued draft climate disclosure rule, will require companies to report on greenhouse gas emissions and other climate-related impacts and risks. At the global level, the International Standards Council for Sustainable Development, an independent standards-setting body, is on track to finalize similar financial reporting guide climate and other ESG-related issues by June of this year.

Proponents say the new requirements will hopefully lead to improved data and increased confidence in ESG metrics. “When we see an asset manager say, ‘I have an ESG fund, a zero net fund, or a green fund’, it gets a lot of criticism: well, wait, what does that actually mean? Spaulding said. “I do think that over time we will see stricter definitions and more transparency.”