Many asset managers have stopped offering funds supporting environmental, social, and governance (ESG) goals in the face of political backlash. In new research, Omar Vasquez Duque shows that much of this backlash is due to semantics and poor fund design, and that investors across the political spectrum are willing to take lower financial returns to support specific goals under the ESG label.
Environmental, Social, and Governance (ESG) investing has become a flashpoint in American politics, reflecting the broader ideological polarization gripping the country. Republican-led states have enacted laws banning or restricting ESG considerations in public pension funds, citing fiduciary concerns and a perceived conflict with maximizing financial returns.
On the other hand, Democratic-led states have embraced ESG as a tool to promote social and environmental goals, often mandating its inclusion in pension fund management. Meanwhile, major institutional investors like BlackRock have faced backlash from both sides of the aisle, with some signaling plans to scale back their ESG commitments, particularly with President Donald Trump back in the Oval Office. This contentious landscape raises a critical question: Are these legislative actions and corporate decisions reflective of the actual preferences of pension beneficiaries? My research reveals that despite political polarization, there is more consensus on social sustainability than commonly believed—if we present it in the right way.
The study is based on two survey experiments with representative samples of the United States population with respect to gender and age. Social scientists have developed different methods to measure people’s preferences. One such method consists of asking people how much they would be willing to pay for a product. This is a contingent valuation survey—and previous research has assessed people’s preferences for ESG investing with this method.
Another methodology consists of presenting people with different options that ideally resemble real-world trade-offs—e.g., an electric blue car selling for $30K and a hybrid red car that sells for $20K—and asking them to choose one of those options. This is what a forced-choice conjoint experiment does. People’s preferences are then inferred from their choices. My study is the first to use this method to measure people’s preferences for ESG investing in the U.S. There are many advantages of this approach, such as minimizing social desirability bias.
To measure participants’ preferences for ESG investing, the study used a series of decision tasks where respondents chose between two hypothetical pension fund options. Each option included an expected annual pension amount and several investment restrictions, such as avoiding companies tied to fossil fuels or gambling. These decision tasks required participants to weigh financial returns against social and environmental considerations.
Each participant made 12 such decisions. The first experiment involved 2,120 participants and included fairly detailed descriptions of investment restrictions—e.g., fund A only invests in firms with a compliance program to minimize the risk of having children working within their supply chain. The second experiment, with 1,086 participants, used broader categories of restrictions—e.g., fund A does not invest in companies that do not abide by the United Nations labor rights standards.
The results challenge the idea that ESG investing is inherently partisan. While Democrats broadly supported social and environmental objectives, Republicans also showed strong preferences for some social goals. However, goal articulation made a huge difference. Abstract concepts like “labor rights,” which some may associate with a political agenda, led conservative respondents to prioritize profitability over social goals. Yet, when social causes were presented in more detail—such as “guaranteeing living wages”—support grew across the political spectrum. This support grew not only among conservatives but also among those who at the beginning of the questionnaire expressly indicated that they would not like their investments to be subject to ESG restrictions.
Specifically, there was bipartisan support for investment restrictions that: 1) excluded companies that may employ children; 2) supported companies that advocate for equal pay between men and women, and 3) favored companies ensuring their workers earn enough to avoid poverty.
The preceding findings suggest that opposition to ESG may stem from misconceptions about what ESG entails or how its goals are communicated. Conservatives disliked investment restrictions affecting fossil fuels and firearms. But the environmental restrictions divide was less pronounced when it conveyed the “environmental impact” of firms rather than the fossil fuels industry. While these two concepts are not identical, the latter is a big part of the former.
Nevertheless, people may well have a strong preference for some social goals but dislike environmental restrictions. The term “ESG” lumps together diverse objectives—environmental, social, and governance—into a single concept. This one-size-fits-all approach prevents many individuals from aligning their investments with their values and fuels misconceptions about what ESG entails.
The ESG label is imperfect for several reasons, but the heterogeneity of people’s values had not been addressed as one of them. As noted, the main rationale behind the anti-ESG-legislation movement is that state pension managers would breach their fiduciary duties if they considered non-pecuniary factors when investing the state pension funds. In simpler terms, state pension managers would pursue a political agenda at the expense of their beneficiaries if they considered anything besides financial returns.
However, this research suggests that is not necessarily the case. Many participants—even conservatives and those who in principle oppose ESG investing—are willing to accept lower returns to support specific social objectives. If lawmakers care about fiduciary duties, rather than banning ESG investing altogether, they should require state pension managers—and perhaps encourage all fund managers—to break the ESG label into its individual components and offer at least a few fund options. Policymakers should move beyond blanket bans or mandates on ESG investing and instead focus on ensuring more granular options that reflect the diverse values of their constituents. Breaking down ESG into its individual components would be a good first step.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
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