Why the conservative backlash to banks' ESG stands gained steam in 2022

December 21, 2022 7:25 PM

After U.S. banks spent years rethinking their stances on environmental, social and governance issues in response to pressure from progressives, conservatives struck back in 2022.

Republican politicians at the state and federal levels targeted banks over their stances on issues ranging from guns to abortion. And corporate diversity initiatives faced challenges both from shareholders and in the courts.

But perhaps the biggest flashpoint was climate finance. Conservative politicians announced retaliatory measures over perceived boycotts of fossil-fuel lending and launched investigations into global decarbonization commitments made by banks.

Banks have traditionally preferred to avoid taking stances on hot-button social issues, but at a time of high political polarization, they may feel increasing pressure to choose sides.

One analyst said that the competing demands from the political left and right create a "Goldilocks dynamic."

"As banks move to assuage ESG concerns, they are at the same time, in an almost inversely proportional way, leading to a weakening of support from their traditional allies in the GOP," Isaac Boltansky, director of policy research at the investment bank BTIG, said earlier this year. "It's never going to be enough or the right temperature for both sides."

What follows is a recap of the conservative backlash against banks' ESG efforts in 2022, as well as a preview of what's likely to come next year.

Decarbonization

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Big banks' commitments to reducing carbon emissions drew fierce pushback from GOP officials, particularly at the state level.

In October, the attorneys general in 19 mostly Republican-led states announced that they were investigating the ESG practices at Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, all of which are members of the United Nations' Net-Zero Bank Alliance.

"We are leading a coalition investigating banks for ceding authority to the U.N.," said Missouri Attorney General Eric Schmitt, "which will only result in the killing of American companies that don't subscribe to the woke climate agenda."

The red-state backlash may already be having an impact on the big banks' actions.

Last month, after some U.S. banks threatened to leave the Glasgow Financial Alliance for Net Zero, the group said that its members maintain "independent investment decision-making" authority in meeting 2050 targets for reductions in greenhouse gas emissions.

There are also signs that the Supreme Court, where conservative justices hold a majority, could put the brakes on a Securities and Exchange Commission proposal that would require banks and other companies to make disclosures about their carbon emissions.

In June, the Supreme Court struck down an Environmental Protection Agency rule from the Obama administration, establishing a standard that reins in the authority of regulatory agencies.

After the ruling, Sen. Pat Toomey, the top Republican on the Senate Banking Committee, said: "The SEC should consider itself to have been put on notice."

Guns

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In September, an international standard-setting body approved a new merchant category code for credit card sales of firearms and ammunition — part of an effort to enhance the ability of law enforcement agencies to track illicit gun sales.

The measure was backed by the New York-based Amalgamated Bank, the Democratic attorneys general in California and New York and various groups that favor gun control.

But it drew immediate pushback from Republican officials. Two dozen GOP state attorneys general warned the CEOs of Visa, Mastercard and American Express that their companies could face legal action if they implement the new merchant category code.

And Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, argued that the new merchant category code will lead to abuses.

In a letter to Amalgamated Bank's CEO, McHenry called the new code "an overt attempt to chill the exercise of constitutionally protected rights" that "poses a serious risk of circumventing important existing legal restrictions on the creation of a firearm registry."

Abortion

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In June, after the Supreme Court struck down Roe v. Wade, several large banks announced that they would expand health benefits to cover travel for out-of-state abortions. The list included JPMorgan Chase, Bank of America, Wells Fargo and Goldman Sachs.

But the bank that attracted the most attention was Citigroup, which had offered to reimburse travel costs for employees seeking out-of-state abortions even before the Supreme Court ruled in Dobbs v. Jackson Women's Health Organization.

A group of congressional Republicans later demanded that the U.S. Senate end its business relationship with Citi in retaliation for the policy. Citi had a contract that allowed it to provide business credit cards to lawmakers, legislative committees and other Senate offices.

Citi did not back down. After the Supreme Court's ruling, the bank's head of human resources, Sara Wechter, wrote in an internal memo that Citi would "continue to provide benefits that support our colleagues' family planning choices wherever we are legally permitted to do so."

Diversity

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Progressive shareholder groups have pressured big banks in recent years to conduct so-called racial equity audits. Earlier this year, one conservative group put a twist on that idea, seeking an audit at Bank of America of what it claimed was discrimination against "non-diverse" employees.

The proposal, which only garnered around 2% of the vote, sought shareholders' authorization for an assessment of whether pay and authority at BofA was being divided up based on "ethnic categories rather than by merit."

Conservative activists also pushed back in the courts this year against corporate diversity policies.

In August, a federal appeals court heard oral arguments in a lawsuit seeking to overturn the Securities and Exchange Commission's approval of a Nasdaq stock exchange rule on corporate board diversity.

Under the rule, Nasdaq-listed companies must appoint at least two diverse directors — including one self-identified as female and another who is either an underrepresented minority or LGBTQ+ — or explain why they have not done so. If the rule remains intact, it could affect a large swath of North American banks and fintech companies.

During oral arguments, lawyers for the advocacy groups argued that the SEC's approval of the rule amounted to government-sponsored discrimination, since it gives preference to women and minorities over other candidates.

The 5th U.S. Circuit Court of Appeals has yet to issue a ruling in the case.

What’s ahead

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Congressional Republicans will have a larger platform next year for their anti-ESG message.

McHenry, the North Carolina Republican, is poised to chair the Financial Services Committee in January after the GOP won control of the House in November's midterm elections. In an election-night victory speech, he said that one of his priorities will be to conduct oversight on ESG-related matters.

McHenry spoke of doing oversight of "woke corporations that are trying to do the Democrats' bidding on the social agenda."

He later elaborated, saying in an interview that the Republican-led committee also plans to push back against ESG initiatives supported by federal agencies under the Biden administration.