Opinion

Michael R. Bloomberg

On Climate Change, Republicans

Need a Crash Course in Capitalism
Red-state lawmakers are increasingly trying to interfere in private
firms’ decision-making. They’re making a terrible mistake.

The climate is changing, and so are the incentives. Photographer: Eddie Seal/Bloomberg

By Michael R. Bloomberg
September 6, 2022 at 9:00 PM GMT+8

Republican elected officials seem to think they’ve found three new evil letters to pair with their
favorite bugaboo, CRT, or critical race theory. This one is called ESG, which refers to investment
strategies that consider environmental, social and governance issues. Critics call it “woke capitalism.”
There’s just one problem: They don’t seem to understand capitalism. And flogging ESG is not only a
terrible economic mistake. It will be a political loser, too.
Republican critics of ESG have focused primarily on the “E,” arguing that climate change should not
factor into investment decisions. Texas has adopted a law restricting the state, localities, and pension
boards from doing business with financial firms that seek to limit their exposure to fossil fuel
companies. Even firms that have large investments in fossil fuels are being banned, if they dare
attempt to price climate risk into their portfolio allocations. Oklahoma has enacted a similar law, and
other Republican leaders are moving in the same direction. Last month, Florida’s Republican
governor, Ron DeSantis, supported a resolution barring pension fund managers from considering ESG
factors.

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All these anti-ESG crusaders position themselves as defenders of the free market. But they are
attempting to use government to block private firms from acting in the best interests of their clients,
including retired police officers, teachers and many others who depend upon public pensions. And in
doing so, they are turning the most basic investment rules on their head.

Any responsible money manager, especially one with a fiduciary duty to taxpayers, seeks to build a
diversified portfolio (including on energy); identifies and mitigates risk (including the risks associated
with climate change); and considers macro trends that are shaping industries and markets (such as the
steadily declining price of clean power).

That’s investing 101, and either Republican critics of ESG don’t understand it, or they are catering to
the interests of fossil fuel companies. It may well be both. Either way, they are standing in the way of
the most powerful force we can muster in the fight against climate change: the private sector. And the
stakes could not be higher.

Every day brings new stories of climate-related extreme weather wreaking havoc on communities
across the country and around the world. Drought conditions are so bad in some places that receding
water levels are revealing everything from ghost towns and Nazi-era war boats to Neolithic
monuments and dinosaur tracks. Rivers like the Danube are running dry and struggling to carry
freight, worsening the world’s supply chain problems.
In other places, floods have forced people from their homes, killing more than three dozen in
Kentucky last month and leaving much of Jackson, Mississippi, without drinking water. In Pakistan,
floods have killed more than 1,100 people. Death and destruction from record-setting heat waves and
wildfires have been no less severe.

The American people know that climate change is real, and as polls consistently show, large majorities
want to tackle it, and not just through government action. A poll last year found that two-thirds of
investors support their retirement funds offering ESG options. There is also strong support among
investors for greater transparency of carbon emissions, and for good reason.

In a world rapidly moving to clean energy, companies that are dependent on fossil fuels put investors
at greater risk. Financial firms, and increasingly individual investors, want to know what those risks
are, so they can factor that information into their capital allocation decisions.

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An effort I help lead, called the Task Force on Climate-Related Financial Disclosures, has enlisted
thousands of firms that have voluntarily agreed to provide data about their emissions and exposure to
climate risks, such as supply chain disruptions. These and other firms want to be able to price climate
risk into their investment decisions, and without accurate and reliable data, they can’t do that.

Given this market-driven demand for data, and strong bipartisan public support for climate action, the
Securities and Exchange Commission is in the process of adopting reporting requirements that build
on the framework we created, as other nations have also done.

The fact is: Climate risk is financial risk. Costs from climate-related weather events now exceed $100
billion annually — and that is only counting insured losses. Accounting for these and other losses isn’t
social policy. It’s smart investing. And refusing to allow firms to do it comes with a big cost to
taxpayers.
A recent study of Texas’s anti-ESG law found that its taxpayers could pay an extra $532 million in
interest on borrowing costs, just based on the first eight months of 2022 alone. That’s hardly
surprising: When states limit the supply of firms that are eligible to finance their debt and manage
their pensions, the remaining firms can charge higher rates and extract higher fees.

Of course, we will all pay far larger costs if we continue to allow elected officials to block the private
sector from acting on climate change. The good news is that the next generation of Republican leaders
seems to understand that the market has a crucial role to play. According to recent polling, three-
quarters of Republicans aged 18-39 believe the nation should be doing more to prioritize clean
energy, including passing a carbon tax.

Hopefully, their elders in office will get the message soon. Until then, maybe we should send them all
to a financial literacy class. Or, better: send them on a cruise down the Danube.

To contact the editor responsible for this story:

Timothy L. O'Brien at tobrien46@bloomberg.net

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