Environmental, and Social, and Governance...Oh My!

We take a closer look into the acronym ESG, short for Environmental, Social, and Governance. Our Executive Director Bethany Davis Noll is joined by former Maryland AG Brian Frosh to discuss how necessary ESG factors are to the financial well-being of companies and consumers, as well as highlighting the harm to communities caused by ignoring this data.

Show Notes


Bethany Davis Noll: [00:00:00]

Hi, I’m Bethany Davis Noll. You’re listening to Recharged with the State Impact Center, a podcast where we tackle the latest legal and policy debates about how to protect the planet and people’s health. With a focus on the powers and duties of state AGs, combining research and expertise with a look at careers in the field, we will learn more about the role of states in protecting people and the role you and I can play.

Today, I’m joined by former Maryland Attorney General Brian Frosh and together we’re going to dig into this mysterious acronym ESG. We’ll talk about what it really means, what it means for attorneys general, what it means for you. Hi Brian. It’s great to have you on the show.

Brian Frosh:

Thanks a lot, Bethany. It’s great to be with you.

Bethany Davis Noll:

So I said we’re going to talk about this acronym, ESG. What is it and why should we care about it?

Brian Frosh: [00:01:00]

Well, Bethany, it relates to businesses, and practices that they engage in for investing with their customers in general. And the ESG stands for environmental, social, and governance factors. And any smart business today is looking at each of those categories to make sure that they’re not going to get in trouble.

I mean, if you’re not paying attention to the climate. You are risking floods, you’re risking fires, tornadoes, you name it, same with social and governance issues. If you have, if you have a company and you’re cheating the government or you’re cheating your customers, you’re going to get in trouble. So it’s important for the folks who are lending them money, who are providing them insurance, to know whether or the folks who are buying their stock to know whether these companies are doing the right thing.

Bethany Davis Noll: [00:02:00]

That’s very helpful. Okay. I’m going to flag right here that we do actually have a plan for a series on this topic. These practices that you’re talking about, Brian, are really steps that companies are taking to be responsive to communities with buying power who are demanding that companies take socially responsible steps to assess climate risk, diversity, equity, inclusion, and justice, and take steps that redress the impacts of white supremacy. In a future episode, we’re planning on talking about the relationship between those community demands and ESG.

Today, we’re going to focus on the world of AGs and some of the financial impacts of the attack on ESG. So, Brian, I had a student last semester, I teach a class at NYU called Government Lawyering, and students are really excited about this, by the way, and my student, whose name is Kathleen Morris, wrote about ESG in her paper, she wrote about it for my class, and then she wrote a blog post for the center, and her post got me thinking about all the ways the AGs regularly engage with ESG issues and their routine investigations and enforcement work.


And I asked her to sum up the research for us and so I thought we’d play a clip of her talking about her blog post to get us some background here for this conversation. How does that sound?

Brian Frosh:

Sounds good to me.

Kathleen Morris:

Thanks, Bethany. As ESG is becoming an increasingly polarizing term, I wanted to tease out what this controversial acronym really means, to demystify the acronym that’s being tossed around regularly these days.

The use of ESG data largely originated with socially responsible investing, also known as impact investing, and strategic divestment. But it also informs decisions by asset managers who are increasingly using ESG data to account for risks caused by a changing climate and other factors that affect the bottom line.


And that’s where AGs come in. AGs across the spectrum regularly investigate businesses for the same sort of environmental, social, and corporate governance issues that ESG data seeks to quantify for asset managers. Take, for example, the Texas Attorney General’s Office’s enforcement action against Audi and Volkswagen for their technology that evaded emissions tests and violated Texas environmental laws.

That scandal resulted in a significant downgrade in Volkswagen’s ESG ratings from an ESG data provider in September 2015. This is because these sorts of business decisions affect shareholder value. The thing that’s perplexing to me is that numerous AGs, including Texas’, are now scrutinizing the use of ESG information in financial decision making, writing letters to asset managers, insurers, and so on, and by all accounts causing a chilling effect on this type of decision making.

So I wrote this piece to dig into what a more balanced and technical discussion of ESG might look like.

Bethany Davis Noll: [00:05:00]

Thank you, Kathleen. Thanks for doing that for us. Really appreciate you talking about your blog post for our podcast and for writing about this topic for us. For folks out there, Kathleen’s blog is available in the show notes and on the Center’s website at stateimpactcenter.org. Okay, Brian, so you heard what Kathleen said. You were Maryland AG for many years. What do you think about her point here about how AGs regularly engage on ESG issues? From consumer protection to environmental enforcement and so on.

Brian Frosh:

Yeah. Well, she hit the nail right on the head. I mean, if I’m an attorney general, I was an attorney general and we clean up the messes that corporations make, you know, and Volkswagen’s a great example. It hits two of the three, at least two of the three legs of the ESG stool, if you will. They were polluting the air. They were violating Maryland law. It was an egregious violation. It was intentional. And that’s kind of a second leg of the stool here. There was something wrong with the governance at Volkswagen.


They were trying to cheat. They were trying to pretend that their diesel vehicles were cleaner than they were. And in fact, they were churning out terrible pollution. So if I’m investing in Volkswagen and I don’t know that they’re cheating, if I don’t know that they’re polluting, I’m going to lose money.

If I’m an insurance company and I insure them, let’s say, for example, against officer and director liability. I’m going to lose money. So it’s important for investors to know. It’s important for insurers to know. It’s important for lenders to know because we’ve seen rafts of bankruptcies of companies that aren’t paying attention to those three rules of the road.


If you want an example of the social aspect of it, look at the Weinstein companies. This is, you know, they were the among the biggest, most influential Hollywood producers and showrunners and moviemakers and their value of their company went to zero because Harvey Weinstein was committing crimes, sexual assaults, et cetera.

So each one of those three factors is critical to pay attention to. I can name you example after example, Juuls, a company that we went after, as did many other attorneys general across the country, because they were marketing addictive products to children. And Purdue Pharma was not only selling highly addictive medicine, they were representing that it wasn’t addictive.


Purdue Pharma is gone with the wind. I mean, the company’s bankrupt and it happens all the time. And it’s really important for investors and insurers, et cetera, to keep their eye on the ball.

Bethany Davis Noll:

Okay. So what’s the problem with that? What’s happening here? Why would we look at that information?

Brian Frosh:

Why wouldn’t they? That’s a great question. You’ve got Republican attorneys general threatening asset managers and insurers, banks, and other businesses. If you’re doing this, we’re going to prosecute you. Or they threaten a little more gently than that, but they suggest they’re going to prosecute them. And you’ve got legislatures, mostly in the red states coming in with bills that say you’re not allowed to, you’re not allowed to invest with companies that use ESG principles.

So I wrote an op-ed with former Maryland treasurer, Nancy Kopp, and we just gave examples from states that were considering or had passed this legislation, you know, where they say, our state is not going to put its money in banks that are using ESG principles, or we’re not going to let asset managers run our pension funds


if they’re looking at ESG principles and in Texas, their legislation was estimated to cost taxpayers $532 million in higher interest costs in a year. In Indiana, they had a bill to limit ESG investing that could cut state pension returns by $6.7 billion over the next 10 years. In Arkansas, it was estimated they’d lose $30 to $40 million a year in potential investment returns due to a similar law.

It’s like, you know, they’re stabbing themselves in the feet. And it’s not just pension funds that are at risk. It’s the taxpayers themselves where they’re restricting the market and trying to steer money to their favored institutions. In Stillwater, Oklahoma, taxpayers are already on the hook for, and Stillwater is a tiny little place,


their taxpayers are on the hook for an extra $1.2 million because of an Oklahoma law that restricts government contracting with financial institutions that use ESG data. That’s nuts. The law led to more than a dozen major financial institutions, including big lenders that often have more favorable interest rates, like the Bank of America, for example, being blacklisted.

So the city was forced to finance its infrastructure improvements with a higher interest loan than otherwise would have received. This is completely self defeating for those things. Those are just the short term consequences. The long term consequences are potentially much more serious.

Bethany Davis Noll: [00:11:00]

Yeah, it just makes some sense, some common sense, not being a finance expert, but some common sense that if you restrict the sources of capital that you can look to or rely on, your interest rates would go up, rates would go up.

Brian Frosh:

Yeah, absolutely. I mean, one of the things that just befuddles me is there is huge risk in the market and the stock market today in the form of climate change. And you can see it very clearly. I mean, first of all, in billion dollar climate disasters in the United States alone, they have cost our country two and a half trillion dollars since 1980. And that’s not the scary part. The scary part is that the rates are going way up. In the 1980s it was, and I’m just talking about billion dollar climate events. There are much smaller ones all the time that add up a great deal, maybe as much, but just a billion dollar climate events.


In the 1980s, they averaged 20 billion [dollars] from, and it’s gone up quickly, but you know, it’s a straight up curve in from 1919 to 1922, the average was 149 billion [dollars] a year. You can see if you keep going up that curve, it’s going to bankrupt everybody. You can’t ignore that if you’re an asset manager, you can’t ignore that if you’re an insurance company.

And, you know, we’ve seen insurance companies fleeing California, fleeing Florida. There are 14 insurance companies that have gone belly up in Florida in the past couple of years. And others are just getting out of the state because they don’t want to take the risks of Hurricane Adelia or others.

It’s too dangerous to insure coastal communities for them.

Bethany Davis Noll:[00:13:00]

Okay. So I think what we’re talking about here is information, right? Information about those risks. That you would hope your asset manager and whoever would take into account information and transparency into that you and I both need. So how come that’s not a bipartisan issue?

Is it a bipartisan issue actually?

Brian Frosh:

Well the fact is that big businesses get this, I mean, lots of small businesses get it too, but they’re trying to chase away the big, the biggest asset managers, the biggest banks, biggest insurers.

And there are lots of folks. I mean, there were hundreds of bills introduced to impose these restrictions, all over the country. Most of them fail. I mean, strangely, the chamber of commerce seems to be an advocate for these kinds of bills, but in most state legislatures, they’ve been rejected. Now that hasn’t stopped the advocates.


They’re still going after them and there are 21 or 23 Republican attorneys general who seem to be riding this hobby horse really, really hard. Not a single one is saying, wait a minute, guys, let’s, let’s stop pretending that the climate changes are not going to affect us in the United States.

You may not want to take the steps that I think are absolutely essential for our society to survive, but, at least if you’re making bets, bets on you know which companies you’re going to buy or sell, you’re an idiot if you’re not taking that into account.

Bethany Davis Noll:

Yeah. I mean, the research I’ve read actually shows that a lot of people, people favor looking at those risks and they favor, you know, economic policies that take them into account.

So I’m still going to keep asking the question, what’s going on here? And, actually, is there a lot of bipartisan support for taking this stuff into account?

Brian Frosh: [00:15:00]

Well, I mean, I think the latest polling shows that it’s really not helping them politically. I mean, I think culture wars are a stupid way to run government.

But it doesn’t seem to be getting them very much traction. And, as I said, most of their bills have failed. But, and the ones that have passed have been watered down, but they’re still dangerous.

Bethany Davis Noll:

Okay, so I have a question about those bills. I live in New York, and my parents live in Illinois, and you live in Maryland.

If these efforts restrict information work, what is it, does it matter to me?

Brian Frosh:

Well, it does because we’re going to get, the businesses are going to get in a conflict and we’re in a conflict because, so Texas will say, we are not going to allow somebody to manage our pension fund if they use ESG anywhere in the United States, or


anywhere in the world. And of course, you know, in the European Union, these practices are required. But what it means is if you want to do business in Texas, you may try to alter your conduct elsewhere in the country in order to get the business that they’re promising you in Texas. So that means that you name an asset management company and they may say, well, shoot, New York isn’t requiring me to do ESG and Texas is requiring me not to do it.

So I’ll, I’ll not do it. And I can’t do it in New York because Texas is telling me I can’t do it anywhere. It’ll affect the value of your pension. And that’s, that’s very dangerous.

Bethany Davis Noll:

That’s very helpful. That’s a helpful way to think about it. A little, a little scary. You know, in July there were a lot of hearings in Congress about this, and we have a clip here from that hearing that we’d like to play from the Illinois treasurer, where my parents live, and where I think he sums things up really well.

So let’s play that clip.

Committee Hearing - Michael Frerichs: [00:17:00]

This is what brought me here today. We are witnessing a widespread, highly coordinated, politically motivated attack on investors and the hardworking people they serve. This pushback is anti free market and anti investor. It is misleading and it is harmful. It harms retirement savers, pensioners, working people, businesses, and it harms America.

This coordinated campaign is focused on ESG investing. Most people don’t know what ESG is. ESG is data. ESG is simply additional information that investment professionals use to assess risk and return prospects. It is about value, not about values. In order to maximize returns, an investor must be able to manage and mitigate risk.

The more data we as investors have, the better informed our decisions are when selecting investments over the long term. ESG is about looking at a wider range of risks and value opportunities that can have a material financial impact on investment performance. While I welcome healthy debate about best practices and fiduciary duty, I do not welcome the deployment of blacklists and overreaching legislation that would strip professionals of their freedom to invest responsibly.

When it comes to material data, it’s irresponsible to tell investment professionals to ignore information that they can use to do their jobs better. If unchecked, this war on investors will stifle economic growth, cost taxpayers and pensioners billions of dollars as many studies have already found, and it will obstruct investors’ ability to protect and grow people’s hard earned savings.

And closing, now is not the time to stop investors from considering prudent data that can lead to better returns over the long term. The American economy depends on investors. Please let us do our jobs. Thank you for your time and attention.

Bethany Davis Noll: [00:19:00]

So we’ve talked about financial risk to investors and to taxpayers from this anti ESG legislation and, you know, all these things that folks are concerned about on this front, what are the environmental or social impacts from any of this attack on the use of this data?

Brian Frosh:

Well, let me backup a little bit and give you some more examples of the problems of ignoring it. As I said, you know, the Weinstein Companies were the poster children for the social stuff. I mean, they’re gone and it was because they were breaking the law. Enron is another good one. You’re talking about corporate governance. Those guys were engaged in an elaborate accounting fraud and was a series of corporate governance failures, or malfeasance, and they’re out of business.

People lost billions of dollars as a result. Purdue Pharma, as I said, is another one. You know, they got people addicted and caused deaths and


addiction across the country that we’re still dealing with. And it was because the leaders of that corporation decided that they were going to cheat and they were going to just try to sell as much product as they could without regard to what, it was doing to the public.

Asbestos manufacturers, same thing, you know, they knew they had a product that was killing people and they kept pumping it out. They’re all gone. I mean, they’re all in bankruptcy. And I just think, I’m sure, that there is a real risk that asset managers and businesses pull away from environmental, social and governance commitments will end up in trouble.

They’ll be very real costs to their customers, to the people who have pensions in state funds. Florida has probably gone further than any other state. They passed a law that obligates banks to lend to gun manufacturers, to fossil fuel companies, and to private prisons. And, you know, I can tell you as an attorney general, each one of those industries is in trouble one way or another, and it’s ridiculous for the same people who are complaining about affirmative action to create affirmative action for oil companies and gun companies and private prison company.

The things that affect a company’s value are not just the spreadsheets that you can see about the profits and losses and expenses, et cetera. They have a great impact on the ESG principles. Have a great impact on whether a company does well or poorly. And if you’re not looking at that stuff, you’re going to lose.

Bethany Davis Noll: [00:22:00]

Yeah, you know, I, I always learn so much when I talk to you, Brian, and I’m learning so much right now. And I have learned so much about securities law and how companies are run just in like trying to figure out what this acronym means. It’s been a lot of fun. You know, at the end of the day, we are talking about the bottom line of a company or for our pension fund.

And there’s so much that’s there where there’s a, you know, there’s common cause to be had across different interest groups. And I don’t know, is there anything you’re hopeful about here?

Brian Frosh:

Well, I mean, I do think that reason will ultimately prevail. But as long as you have politicians who think they have something to gain by pretending that climate isn’t an issue, that corporate governance isn’t an issue, that treating people appropriately is not an issue in a corporation, we’re going to continue to have this fight.


And the ultimate irony is they’re the ones who are yelling loudest about the free market. And capitalism and all that stuff. And yet they’re trying to dictate to consumers and to their tax payers, which companies are going to be favored in their states. And my reaction is, if you want to, you want to make those kinds of calls, bet your own money on it.

You know, if you want to, you want to bet there’s not going to be climate change, feel free to invest your own money in the companies that are deep into that, and if you believe in the free market you really ought to let it operate.

Bethany Davis Noll:

Yeah. Another thing I learned recently from some scientists and some researchers at Yale is that politicians are really bad at gauging what people think about climate. No criticism to any politicians in the room here or former politicians in the room right now. But apparently the polling shows that. It’s vastly like politicians on both sides of the aisle underestimate what people think about climate or how much people care about doing something about it. And the research I think would help, you know, looking into what people actually think and what people actually want out of you as a politician might actually help.

Brian Frosh:

Yeah, I mean, absolutely. I mean, I think we’ve come to the point where the position that there is no climate change that the climate deniers are making the argument.

Who are you going to believe me or your own eyes? And people ain’t that stupid is the bottom line when their home gets flooded for the 10th time or gets washed away or blown away or burned up. Whether they’re a Democrat or Republican, sooner or later they come to understand that we have a real challenge here.


I mean, it’s an existential threat, I think. I think our country needs to address that way more aggressively than we have but simply in terms of politicians spending your money, investing your money for them to ignore it is just insane. I think people are beginning to realize that’s the case.

Bethany Davis Noll:

That’s your hopeful note, is faith in humanity?

Brian Frosh:


Bethany Davis Noll:

Thank you, Brian. I really, really love talking with you about this. And really, really grateful to you for appearing on our podcast.

Brian Frosh:

It’s been a pleasure for me, Bethany. I always love talking to you. I learn as much from you as you think you learn from me.

Bethany Davis Noll:

That’s great. Well, thank you. We’ll have you back here, hopefully soon.

Brian Frosh:

It’ll be, it’ll be a blast. It’s great to talk to you.

Carlos Minaya: [00:26:00]

Thank you for listening to today’s episode. on environmental, social, and governance factors. Links to the material discussed are available in the show notes for this episode. You can find it by searching Recharged. That’s R E C H A R G E D on our website at stateimpactcenter.org. If you have any questions on today’s episode or previous ones, you can email us at stateimpactcenter at NYU dot edu, and follow us on Twitter and Instagram using the handle at State Impact Center. Recharged with the State Impact Center was produced and edited by Jasmine Elbekraoui and me, Carlos Minaya.

Bethany Davis Noll

Bethany Davis Noll

Executive Director

Bethany Davis Noll is an expert in administrative and environmental law and an experienced litigator. She is an adjunct professor at NYU Law and former co-chair of the Environmental Law Committee of the New York City Bar Association.

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Brian Frosh

Brian Frosh

Distinguished Senior Counsel

Brian Frosh served as Maryland’s 46th Attorney General from 2015 to 2023. During his two terms AG, Brian Frosh worked to ensure fairness, equality and justice for all Marylanders. Prior to being elected AG, he had been an attorney in private practice since 1976.

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