Investors brace for midterms' ESG backlash

Investors are preparing for a backlash to ESG initiatives should Republicans win state and national races on Tuesday.

Why it matters: Banning ESG evaluations entirely, as some Republican candidates have proposed doing, could put investors at risk of forgoing their legal fiduciary responsibilities.

State of play: Republican candidates are looking to Texas' fight against BlackRock as a playbook for future action against other investment groups that have committed to investing in ESG assets.

• Texas officials banned state entities from doing business with BlackRock and other firms the state had identified as "boycotting" oil and gas investments.
• The ongoing attacks from Texas officials and other Republican lawmakers prompted the world's largest asset manager to clarify its position with a dedicated website outlining its ESG strategy while doubling down on its commitment to that strategy.
• Other Republican candidates are hedging Texas' strategy slightly by suggesting legislation dictating that investors should not consider ESG risks when evaluating investments, instead of outright banning those companies from doing business in the state.

What they're saying: "Trustees and advisers have a fiduciary duty to clients, and if you chop off corners of what they can and cannot consider, it doesn't allow them to acquit their responsibilities," Hughes Hubbard & Reed partner Alexandra Poe tells Axios.

• "What if, in the 90s, there were people that felt the oncoming advent of the internet and all that the technology implied was bad, so they told asset managers they can't consider the impact of the tech boom and the internet on companies as they were operating? You would hamper them from considering something that had an incredibly significant impact," Poe continues.

Between the lines: Any investment with an ESG angle could force investors on the defensive regardless of whether they explicitly included an ESG risk assessment in the decision-making process, Poe says, which could hamper overall investment activity in the space.