Federal Financial Analytics, Inc.

The ESG Assault Gathers Political Firepower

February 18, 2020

As ESG efforts move from minority-shareholder initiatives to major-bank credit policies,
sectors subject to sanction have come to fear massive divestiture. They have thus launched a formidable political backlash with considerable potential to become a powerful political movement in the 2020 election. Large banks and investment managers will be pilloried by progressives and denounced by conservatives, with the one in the White House holding the power to punish them in word and even deed.

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In 2019, the early stages of a political backlash against ESG finance was discernible in Senate legislation, S. 821, to yank the charters of banks and payment companies that allocated credit on any ground other than creditworthiness. That bill was sparked by the growing number of financial institutions denying service to firearms-linked enterprises, but it covered all sanctioned entities or individuals. Last week, senior Republicans defended private-correctional companies, introducing S. 3298 to expand the circle of protection to federal contractors. Behind all of these bills and the broader political campaign to which they responded is growing fear across the U.S. fossil-fuel sector that actions such as BlackRock’s late last year, new “brown-penalizing” capital charges, and mandatory EU standards will dramatically hike the cost of their capital to crippling levels.

This is of course what many climate-change advocates hope, but the consequences are so grave to the sector as to provoke a powerful counter-punch. This has yet to take on the public face of the gun industry’s campaign against ESG sanctions, but it is even more due to a powerful base: conservatives and those farther to the right who don’t want “Wall Street” defining public virtue with the power of their giant purses.

We expect that the concerted campaign already gathering momentum will turn into a campaign issue, allowing President Trump not just to decry socialism, but also to suggest that the very biggest banks are against core Republican constituencies. Indeed, calls are already going out for an executive order banning ESG-motivated credit allocation. A statement from the Office of the Comptroller of the Currency banning banks from denying creditworthy applicants is also in the works, with pressure growing for the Securities and Exchange Commission to come up with like-kind standards forcing investment managers and public funds to focus on investor return, not social or environmental criteria. The challenges of differentiating investor or credit risk from social and environmental policy is evident in all the pressure on the Federal Reserve to recraft its stress tests to take climate change into account, a movement already moving forcefully in the United Kingdom and European Union.

The most potent near-term political risk for financial institutions will come this spring during annual-meeting season. Anything financial institutions do to placate climate-change, gun-control, or other advocacy voices will bounce right back in strongly-worded complaints from top Congressional Republicans. We understand that the White House and Trump campaign are biding their time, waiting for the right action against the most significant interest to launch an anti-Wall Street fusillade. The extent to which this turns into substantive edicts depends in the near term on what the President puts in any executive order. The election’s outcome will determine if financial institutions are ordered by the new President to serve all comers or if he or she instead demands that no one doing that which is eschewed by ESG advocates gets a nickel. Either way, careful strategic positioning is essential to prevent a circular firing squad.

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