In the November midterm elections, the twin tides of progressivism and populism will crash ashore, and financial institutions will need to look further down-ballot than ever before to assess the risks they face from incoming elected officials. While governors are the main state executives shaping policy debates, now other statewide officeholders that traditionally focused on specific government functions are advocating for policy changes as well, and they have banks and asset managers in their sights.
This shift was on full display this summer as a number of major financial institutions found themselves under fire from an unexpected source. Both Texas Comptroller Glenn Hegar and West Virginia Treasurer Riley Moore announced the disqualification of a number of banks and asset managers under recently passed laws prohibiting their states from doing business with "financial institutions that are engaged in a boycott of energy companies." The investment firm Morningstar felt similar heat after Arizona Treasurer Kimberly Yee warned the firm its environmental, social and governance ratings subsidiary was violating her state's anti-BDS law. Last September, Yee was the first of seven state financial officers to divest pension funds from Unilever after its subsidiary Ben & Jerry's announced it would no longer allow sales in Israeli settlements. These moves follow Maryland Comptroller Peter Franchot's 2019 declaration that his state's pensions would divest from any and all Alabama-based companies in reaction to that state's strict abortion law.
These actions may seem like unconnected responses to disparate political debates but taken together they signal a larger transformation of state treasurers, 36 of whom are independently elected. State financial officers are just the latest down-ballot statewide officeholders to recognize political opportunity in policy advocacy. The massive tobacco settlement in the late 1990s helped state attorneys general recognize they could move beyond straightforward law enforcement to creative legal interpretations that pressure disfavored industries or signal opposition to a president. Not surprisingly, over the past 10 years campaign spending on AG races has more than tripled, fueled by corporate funds flowing into national groups like the Republican Attorneys General Association and Democratic Attorneys General Association.
Now, state treasurers are realizing they can wield similar political influence given they both regulate and participate in financial markets. In endorsing the Republican in this year's California controller race, the East Bay Times expressed concern that the Democratic candidate viewed the role "as being a 'social justice warrior' who uses the audits of the office to lobby for policy change." The New York Times recently raised the alarm over "a coordinated effort by state treasurers to use government muscle and public funds to punish companies trying to reduce greenhouse gases" or "embrace environmental, social and governance priorities."
With culture wars now playing out in state capitals as well as Washington, it is not surprising that the focus on state-level lobbying has spiked significantly. Now that lobbying will have to include state financial officers. Their influence over how and where their state places its capital can create shockwaves for banks, asset managers and firms hoping to do business with a state. More than $4.56 trillion is currently held in 300 state-administered pension funds, and state treasuries collected a total of $1.27 trillion in revenue last year. That is considerable market power, particularly when the office wielding it is also a market regulator.
State financial officers are increasingly recognizing their portfolio can be a political force. Last year, 15 state treasurers launched a coalition opposing ESG commitments. Now, California's state treasurer is pushing her state's teachers' pension fund to divest from fossil fuels, which Maine's treasurer began last year. Similarly, at least four state treasurers — Connecticut, Rhode Island, Nevada and Massachusetts — have divested or are seeking to divest from investment funds with firearms-related holdings.
State treasurers are even engaging in foreign affairs, punishing companies that restrict commerce with Israel, or more recently, companies that engage in commerce with Russia. If the U.S. and China continue at least selected decoupling, this trend could become very complicated for banks and asset managers very quickly.
This politicization of commerce places business in a precarious position. Conventional wisdom has long dictated that companies should be apolitical to avoid alienating or angering customers, but in the past decade the pressure to insert themselves in political and social debates has grown considerably. That is because, amid rising polarization and loss of trust in many civic institutions, business remains the most trusted institution today. Yet while the principles in question can seem straightforward — every vote should count, climate change is real, gun violence should be thwarted — behind these shared principles are often expectations from well-coordinated activists that firms will endorse divisive, partisan solutions.
Taking a stand inherently attracts and alienates customers depending on their view of that stance, meaning companies need to fully understand their customers and stakeholders before starting any corporate advocacy. That is especially true when a firm counts state governments themselves among its customers or investors. As the trend of politicized commerce has gone from Washington to state capitals, banks, asset managers and firms that rely on institutional capital will have to be more mindful in how they engage in policy and cultural debates. Just as in physics, every political action has an (un)equal and opposite reaction. State treasurers joining the fray is just the latest example.
