Preempting Capitalism – An Alarming Trend Harming Climate Action
The Local Solutions Support Center is excited to continue a blog series featuring our 2022 Research Cohort. Each month, a member of our Research Cohort will explore a different topic and its connection to preemption. This month’s post is by Ramón Cruz, President of the Sierra Club. Here, Cruz explores how some state legislatures are targeting private financial institutions in order to boycott or penalize them simply for adopting measures that consider climate change in their investments, constituting a preemption effort against proactive climate action.
Environmental awareness and the fight against climate change has finally reached the mainstream with proposals for climate action in nearly all fields of the economy, from agriculture and infrastructure to finance and manufacturing. The passage of the Inflation Reduction Act (IRA)¹ and the Infrastructure Investment and Jobs Act (IIJA)² move us beyond the legal and regulatory tools that have been the focus of the environmental movement for the last few decades into unprecedented opportunities in the form of tax incentives, credits, and funding for infrastructure, manufacturing, and technology development. There seems to be universal interest in using these new funds at the state and local levels, even though these laws passed without any Republican support.
The markets and financial institutions recognize this and are seizing these opportunities. There is a shift towards financing the clean economy that, while modest, represents a much needed advancement in the fight against climate change.
Despite these achievements, there is surprising resistance in some Republican-led state legislatures. These states are targeting private financial institutions operating under free market premises in order to boycott or penalize them simply for adopting measures that consider climate change in their investments, constituting a preemption effort against proactive climate action.
Throughout the history of the industrial revolution, both governments and the private sector have played important roles in the financing of fossil fuel extraction and power infrastructure. The US government has provided the industry with important subsidies in domestic and international development and used public pension funds to support it. Equally, banks, insurers, asset managers and asset owners utilized their power to favor fossil fuel expansions.
However, the passage of the IRA and the IIJA marks a shift against the preference towards the fossil fuel industry. We are seeing more public funds voting their shares and applying client pressure to change the practices of their investments. Similarly, the private sector banks are catalyzing private investments in clean energy projects and funds that advance social justice. The environmental advocacy community is trying to move polluters and banks to adopt more credible net-zero transition plans, to require capital charges for fossil fuel financing, and to influence US financial regulators to require more robust climate risk disclosure by companies and investors.
“It is contradictory that a party that prides itself for being supportive of free markets and capitalism is right now doing exactly the opposite for the sole purpose of following an anti-climate agenda.”
Even if modest, there has been some advancement in this area and some climate pledges have been made by some Wall Street firms. The largest asset managers like Black Rock or Vanguard remain the largest investors in fossil fuel companies.³ The largest US Banks – JPMorgan Chase, Citibank, Wells Fargo and Bank of America also remain the biggest funders of fossil fuels in the world. Notwithstanding these realities, the modest advancements of climate pledges have triggered a backlash from the fossil fuel industry and their allies, especially in Republican dominated states, with the claims that “woke capitalism” is trying to push an Environmental, Social, and Governance (ESG) investing agenda that legislatures or state comptrollers are trying to counter. This has become the latest battle ground in the war to preempt smart climate action.
These state treasurers and legislators are using their public offices, as well as the taxpayer dollars and retirement funds they manage, to stop financial institutions from protecting investments from climate risks. Several states like West Virginia, Louisiana, and Florida, recently passed laws or took actions to prevent their pension funds from considering sustainability when making investment decisions.
In Texas, the comptroller prohibited the state from doing business with financial institutions that they claim are “boycotting” the fossil fuel industry. These private financial institutions had opted to institute restrictions on their own portfolios that are related to gunmakers and fossil fuel companies.⁴ One could argue that the Texas lawmakers’ move damaged relationships of some banks with the state, reducing the state’s ability to negotiate on financial costs, making Texas taxpayers pay large sums in extra fees.
Learning from Texas’ preemptive mistake, West Virginia lawmakers gave the state treasurer a waiver that protected him from being sued for any costs resulting from a similar law, which punished banks that do not want to finance coal projects.⁵ It is not clear why a waiver was needed, but the suspicion is that officials would know that this law would likely harm taxpayers and they wanted to protect themselves.
But pro-climate leaders are increasingly speaking out. Several states including Illinois, Maryland, and California have passed or proposed laws that support sustainable investing. Thirteen state treasurers,⁶ the comptroller of New York City,⁷ and 17 state attorneys general,⁸ all Democrats, have publicly countered the “anti-ESG” offensive. In the coming months, many more elected leaders, at all levels of government, might follow this example.
In order to follow the slow but steady trend for climate-smart policies, we need to continue holding financial institutions accountable while exposing these preemptive tactics that climate-deniers are using. It is contradictory that a party that prides itself for being supportive of free markets and capitalism is right now doing exactly the opposite for the sole purpose of following an anti-climate agenda. The global trend towards a climate action agenda is irreversible, we just need to ensure that a transition towards a clean economy happens without the least amount of hurdles so that it can fulfill the aspirations of the IRA and the IIJA of promoting sustainable development and advancing social and environmental justice.