Introduction:

As the risks of climate change and societal risks play an increasingly destabilizing role in business, ESG investing is a necessary strategy to protect shareholders’ investment outcomes while also promoting positive social values. A review of 1,000 case studies conducted between 2015 and 2020 found that considering environmental, social, and governance (ESG)  factors improved companies’ investment performance in the long-term. Yet, conservatives have singled out ESG investing as a target of political ire in the ongoing battle against “woke capitalism.” Religious institutions, who have a long history of relying on ESG principles to invest in accordance with their faith and values, can (and should!) play an important role in fighting against the political backlash against ESG by continuing to connect their investment practices to the right to exercise their religion as they see fit.

The Role of Faith-Based Investing in the ESG Movement

Faith-based investors are uniquely situated in the world of ESG investing. The practice of linking religious values to investment decisions dates back to the 18th century, when Quakers and members of the Methodist Church spoke out against profiting from the slave trade. This movement gained additional prominence in the 1970s and 1980s, when religious groups led the movement to boycott firms that refused to divest from South African apartheid. 

Faith-based investing remains quite popular, with the number of faith-based funds growing in recent years. Many faith-based funds compile portfolios which exclude investments in “sin stocks” that promote particular business interests, like alcohol, tobacco, and gambling. Additionally, religious institutions often invest their pension plans, held and maintained for their employees, in faith-based funds. One estimate values Christian- and Islamic-values based funds alone is worth a combined $100 billion. Many religious investors believe that the ability to make decisions in accordance with their social beliefs is an important expression of their faith.

The Anti-ESG Movement

Despite the deep historical roots and widespread support of the ESG movement, conservatives have increasingly attacked the practice of socially responsible investing. Republican lawmakers and politicians, such as Ron DeSantis and Vivek Ramaswamy, have rallied against the concept of “woke capitalism,” a term colloquially used to encompass corporate actions to support left-wing political causes. Though the backlash against ESG and so-called woke capitalism has been linked to a “complex web of conservative groups linked to the fossil fuel industry… to thwart climate action at the federal and state level,” opponents of woke capitalism couch their opposition to supporting such causes in the language of preserving democratic values.

At the federal level, the battle over ESG rages over the Employee Retirement Income Security Act of 1974 (ERISA), which governs private employer-sponsored pension and retirement plans, including many 401K plans. ERISA requires that managers of private pension plans only consider financial factors when making investment decisions. During Trump’s presidency, the Department of Labor ruled that this rule meant pension managers could never consider ESG factors in decision making. However, the agency changed course under the Biden administration, finding that such factors can be used as a “tie-breaker” when evaluating the financial viability of otherwise-equal competing investments. Still, this rule continues to face attacks from Republican states and activists who argue that ESG investing negatively impacts the financial viability of investments.

While ERISA governs private retirement funds, the states still play an important role in imposing restrictions on private retirement investments and in governing the pension funds of state employees. As a result, ESG opponents have turned the states into another battleground. In 2023 alone, Republican state lawmakers in 37 different states introduced over 165 legislative acts to restrict the use of ESG criteria in investment decisions. 

Status of Anti-ESG Bills (January-June 2023)
Died in Legislature or Vetoed by Governor	83
Did Not Pass but Carried Over to 2024 Legislative Session	42
Approved by State Governments	22
Active Bills Pending	12

The anti-ESG flurry of legislative activity has created a chilling effect, preventing some investors from engaging in ESG activities out of fear of political backlash. 

What Does the Anti-ESG Movement Mean for Faith-Based Investors?

Faith-based investors feel more constricted by this changing regulatory landscape, but they remain committed to making investments in accordance with their religious values. The good news is that faith-based investors may be exempt from scrutiny at the federal level if they fall under the ERISA “church plan exemption.” This exemption applies broadly to employee benefits programs which are maintained by religious institutions, as well as their affiliated hospitals and nonprofits. Churches and other religiously-affiliated entities are not required to comply with the ERISA requirement to only consider ESG factors when choosing between otherwise equal financial plans, given the immense importance of socially responsible investing for people of faith.¹ 

However, religious institutions’ exemption from compliance with ERISA means that they are still obligated to comply with state fiduciary laws, including the common law of trusts and individual states’ laws. This means that emerging state anti-ESG legislation restricting pension investments could create a significant barrier for faith-based investors wishing to make financial decisions that align with their religious values. However, a law preventing religious institutions from considering ESG factors may violate the constitutionally protected freedom of religion. For example, in the 1995 case, Basich v. Board of Pensions, Evangelical Lutheran Church in America, a Lutheran-affiliated Board of Pensions chose to divest from any company originating from or doing business with apartheid South Africa, since the apartheid was contrary to their religious values.² As a church-affiliated organization, the Board of Pensions served a dual mission: to make prudent investments on behalf of its beneficiaries and to assist the church in achieving its religious goal. Because of this dual mission, the court found that any investigation into the legality of the Board’s divestment choices would conflict with their freedom of religion. 

Though Basich was only a state-level case and has limited precedential value, a religiously-affiliated pension or retirement fund could use the logic of this case to challenge anti-ESG state laws that directly interfere with faith-based investment decisions. For example, if a church is religiously opposed to the use of firearms, it may indicate an interest in divesting from that industry. This legal strategy has yet to have been tested against emerging anti-ESG legislation, but it may be a helpful way to protect religious investors’ right to invest according to their faith and values.

Conclusion:

As Republican lawmakers continue to target ESG investing at the state and federal levels, religious institutions must use every tool in their arsenal to fight back. By linking the need to invest in accordance with faith-based values with the constitutionally protected freedom of religion, faith-based investors can continue to champion socially conscious causes. 

1. See Medina v. Catholic Health Initiatives, 147 F. Supp. 3d 1190, 1205 (D. Colo. 2015) (“[C]ompliance with ERISA’s fiduciary rules, which emphasize profits above all other considerations, potentially has devastating impact on CHI’s socially responsible investment policies”). ↩︎
2. 540 N.W.2d 82, 84 (Minn. Ct. App. 1995). ↩︎

Ashni Verma, Legal Intern