How Political Backlash Against ESG Is Undermining Bank Decarbonisation 

Environmental, social, and governance — or ESG — started in the 1960s as a way for investors to align their portfolios with their values. Originally associated with excluding industries like tobacco or fossil fuels, ESG has since evolved into a mainstream framework for measuring corporate responsibility. For banks, this includes reducing financed emissions, improving transparency, and aligning lending with sustainable outcomes. 

It sounds promising, and it should be. But in the United States, ESG has become a political lightning rod. 

The Rise of Anti-ESG Legislation 

Since 2021, a growing number of US states have introduced legislation penalising companies and financial institutions that incorporate ESG into their operations. In 2024, for example, West Virginia banned banks involved with ESG from doing business with state organisations.  In 2023, Florida Governor DeSantis prohibited state officials and, by extension, the state itself from investing in ESG funds or selling ESG bonds. In Texas, starting in 2021, numerous companies, including many large fossil fuel investors, were barred from working with state and local agencies unless they abandoned ESG practices. 

Across the United States, legislation targeting ESG is gaining momentum, turning public opinion against businesses and banks that adhere to ESG guidelines. Why? The primary claims after sifting through conspiracy theories are that climate change is a scam and ESG harms the profits of multi-billion-dollar companies.  This shift has been catalysed by a political climate increasingly hostile to climate initiatives, most notably under the renewed influence of the Trump administration, which has long opposed environmental regulation.

How Does ESG Affect Banking? 

At its core, ESG is about risk and accountability. Environmental factors cover a company’s impact on the planet - emissions, pollution, resource use. Social factors relate to how businesses treat people, from employee protections to community engagement. Governance is about how well a company is managed: transparency, board diversity, and long-term strategy. 

For banks, ESG has a direct bearing on how and where they lend. Are they financing renewable energy, or expanding oil pipelines? Are they investing in communities, or fueling inequality? ESG provides a framework to ask - and sometimes answer - these questions. 

But the backlash has made that work harder. 

ESG Reporting 

To conform to ESG standards, companies must adhere to strict reporting and transparency practices. Numerous studies have examined whether or not ESG reporting, as well as ESG as a whole, affects the company's profitability. For now, the findings are mixed, and the sources behind these studies often reveal their biases. It’s up to you to decide what to believe. 

Mixed Motivations: ESG’s Impact and Its Limits 

Unfortunately, most of the banks in North America have yet to fully adopt ESG guidelines, and at this point, it's unlikely to happen. While they might sing its praises from the rooftops, their business practices are far from transparent. While most of the largest banks in 2024 have invested in ESG funds, that doesn’t mean they hold themselves to these standards. Even the largest fossil fuel funders, such as JP Morgan and Bank of America hold significant funds invested in ESG. These banks rank 10th and 5th respectively, in terms of ESG fund investment among the largest banks worldwide. 

Every dollar invested in ESG funds is a dollar for positive climate action, even when it’s part of a thinly veiled attempt to distract from a bank's fossil fuels investments. Investing in these funds, however, is partly why these banks are being blacklisted by state agencies. Investing in ESG funds, is, for some politicians, a step too far towards ‘boycotting’ fossil fuels. Growing backlash against banks divesting from, or boycotting fossil fuels has led states to pass legislation against them. 

Banks are businesses. If they can make money from ESG investments, then they’re happy to invest as well as the fossil fuel industry. With increasing pressure from politicians and press, however, these more sustainable investments are slowing down, leaving ethically minded investors with fewer options. 

It's this contradiction that has fueled the backlash: banks want credit for ESG investments while continuing to finance fossil fuels, and for some politicians, even that symbolic shift is too much. ESG has morphed from a technical reporting tool into a political battleground. In the United States, ESG, and the climate crisis, have become inextricably linked to politics. 

 As with many issues in American politics, this one is firmly divided between Democrats and Republicans, with few willing to cross party lines and make nice. With leading figures in the Democratic Party in favour, and their opposites in the Republican party against, no one can agree on anything. Extreme views take precedence, as always, dividing the public as well as the parties. 

The backlash against ESG has led to less funding for sustainable and renewable projects. The more public pressure they come under, the more hesitant banks become to fund these types of projects. When that pressure is spearheaded by political parties with legislative powers, banks get into quite a hurry to change their policies. To complicate matters, these pressures can increase or lessen depending on which state the bank is operating in, and whether its democratic or republican. Sustainability-linked products or investment vehicles like ESG can also be used to camouflage other investments.  

Some banks have been found offering ‘sustainability’ loans to coal plants, using green buzzwords to cover their tracks. ESG and other sustainable, green and renewable schemes offer them a chance to look good while continuing to fund fossil fuels. 

For many Republicans, ESG is a controlling influence. They believe that businesses should prioritize shareholder profit and high earnings rather than making a positive impact on society.  It’s worth asking why someone might hold this perspective—some may have vested interests in the fossil fuel industry, for example.  

A Banker’s Choice 

Ultimately, banks have to choose whether or not to continue with decarbonisation efforts (if indeed they had any at all) or take a more “neutral” stance on climate change. Under Trump’s presidency, American banks are being forced to consider a fossil fuel-friendly outlook on life. Although many of the largest banks were hardly ‘green’ to begin with, this will only take more and more funding away from responsible, sustainable investments and financing.  

And so far, big banks have been choosing to pull back from positive climate-based reform. All of the largest banks have left the Net Zero-Banking Alliance, reducing its impact to practically nothing. To appease remaining banks, they reduced their commitments and re-worded their policies, in a complete surrender to the banking industry. It didn’t work. 

Thankfully, we can still have faith in banks like Triodos, who refuse to work within such limited parameters and forge their own path in the climate-positive movement.