Even as conservative lawmakers have ratcheted up attacks on DEI—diversity, equity and inclusion—in higher education, another acronym has begun to attract their attention: ESG.

ESG refers to an investment strategy that takes into account not just standard financial considerations but also environmental, social and governance concerns. Commonplace among colleges, ESG investing strategy weighs company impacts on climate change and other environmental factors, labor practices and human rights, and issues of governance—including diversity among board members—as well as shareholder rights and company transparency.

In Florida, where Republican governor Ron DeSantis has captured national headlines by introducing major higher education reforms and going after college DEI efforts, ESG is also under attack. DeSantis announced legislation in February that he claims will “protect Floridians from the woke ESG financial scam.” A bill barring certain ESG investments is currently before the Legislature. If passed, it would bar state and local government from issuing bonds “that will be used to finance a project with an ESG purpose,” according to language in the bill. The legislation would also bar public institutions from considering “a vendor’s social, political, or ideological interests”—an apparent nod to ESG criteria.

Florida isn’t alone in targeting ESG; similar efforts are under way in Alabama, Texas, Utah and other red states. The rhetoric accompanying the introduction of such legislation tends to echo DeSantis, with conservative lawmakers painting ESG as a liberal ploy rather than an investing strategy.

But experts suggest there is more to ESG than what fits into Republican talking points. And limiting such investments for public institutions could come with serious consequences, including revamped endowment strategies and diminished returns that will hurt the bottom line for state universities.

ESG Under Fire

One core objection to ESG investing is the belief that it puts social and environmental objectives ahead of profits, negatively impacting investment returns. Republican critics contend that investors should be concerned only with maximizing their financial gains and that ESG investing promotes a political agenda some have framed as a “woke” scam.

“Anti-ESG Republicans fundamentally view ESG as an incursion of progressive politics into marketplace decision-making,” Joshua Nunziato, who teaches sustainability and other topics in the Leeds School of Business at the University of Colorado, said by email. “This is why they frequently frame their worries in the language of coercion: business leaders are said to be ‘forcing’ diversity, equity and inclusion on the public; they are ‘discriminating against’ oil and gas companies, etc.”

DeSantis and 17 other governors denounced ESG last month, releasing a joint statement that called for “blocking the use of ESG in all investment decisions at the state and local level, ensuring that only financial factors are considered to maximize the return on investment.” While their focus was largely on state pension funds, sweeping bans on ESG or limitations on investing with companies that have ESG strategies will ultimately include college endowments, given that many asset managers include ESG factors in their overall strategy.

“When it comes to endowments, it would be a little harder perhaps to make a fiduciary duty argument as stringent as that of pensions, because endowments do not have to guarantee a payment in the future, but rather serve as financial support for the institutions they benefit,” Paul Herman, founder and CEO of Hip Investor, who has devised a rating system for colleges to gauge investments based on how well companies address ESG, said by email. “In addition, endowments have a higher risk tolerance and are generally not constrained to only certain asset classes like public equities or fixed income. Many endowments invest in private equity and riskier assets and it would be quite unfair to argue that applying an ESG lens adds more risk.”

Experts say the potential impact on college endowments depends on how far anti-ESG bills go. Proposals to bar colleges from doing business with companies that have ESG strategies are especially problematic given that investors have been paying increased attention to ESG.

“Everybody has an ESG strategy. Almost all of the big banks and all of the big asset managers would be guilty,” said Witold Henisz, vice dean and faculty director of the ESG Initiative at the Wharton School at the University of Pennsylvania. “And then you would start doing business only with small, less experienced, less sophisticated banks and asset managers. That [proposed legislation] is going to drastically reduce the number of financial institutions you can do business with.”

Given the ubiquity of ESG, Henisz believes that barring firms with ESG strategies would leave colleges with limited options for investment advisers, which would likely lead to lower returns.

“If the most extreme ESG restrictions were applied to university endowments, fees would go up and returns would go down. But if you were to pass some more restrictive legislation saying you can’t invest in ESG funds—and if ESG funds perform the same over the next decade as they have over the last decade—it’s not clear how big the financial impacts would be,” Henisz said.

Lost in the rhetoric, experts argue, is the true meaning of ESG investing, which emerged nearly two decades ago to look at how environmental, social and governance factors affected returns.

“The term itself was first used by a group of investors as an investment approach to understand environmental, social and governance risks in your portfolio and then avoid them. That is different from looking at your portfolio to understand the impacts that your investments have on people and the planet and trying to deliver better outcomes,” said Meredith Heimburger, partner and head of impact at Global Endowment Management, an investment office that works with colleges. “At its most basic level, ESG investing is the practice of incorporating environmental, social and governance factors into your investment decision-making process to mitigate risks.”

Regardless of the definition, ESG is increasingly in the crosshairs of conservative lawmakers—even as more colleges continue to build it into their endowment investment strategies.

According to the most recent annual report from the National Association of College and University Business Officers, more than 86 percent of 678 colleges that responded to a NACUBO endowment survey have “investment policies [that] include a commitment to environmental, social and governance (ESG) principles in their policies”—up from about 80 percent the year before.

Conversations about ESG on college campuses aren’t limited to investment deliberations. Numerous institutions have launched courses, including executive education certificate programs, to meet marketplace needs as the ESG investment world continues to grow.

What’s Driving Attacks on ESG?

To understand attacks on ESG, Henisz suggests an old journalism maxim: “Follow the money.”

He argues that the politicians taking aim at ESG are less concerned with the supposed ideological aims of investors than with protecting fossil fuels and other industries that are aligned with and donate to the Republican Party—a view supported by other experts.

Notably, some conservative politicians were for ESG before they were against it.

Nebraska’s Republican governor, Jim Pillen, was one of the 18 state leaders who signed the statement last month promising to fight ESG. Pillen tweeted that ESG policies “inject liberal political ideology into investment decisions” and “have no place in Nebraska.”

But as a regent at the University of Nebraska—and while serving as chairman of the board’s Business and Finance Committee—Pillen voted in April 2021 to add ESG criteria to endowment investment strategies, saying in a press release that “doing nothing is simply not an option.”

Asked about Pillen’s past statements versus his recent rhetoric, a spokesperson said by email, “Governor Pillen has consistently supported investing public funds to maximize financial returns.” The spokesperson did not reply to further inquiries about the governor’s reversal on ESG.

Though the legislative focus on ESG is largely on pensions now, experts suggest that colleges need to be prepared for anti-ESG legislation that targets endowments or limits the ability of higher ed institutions to choose certain asset managers. College officials are typically reticent to confront powerful politicians, but Henisz said they need to be prepared to explain how potential financial losses could translate to fewer scholarships or lost programs and make an appeal focused on the likely harm to students.

If college presidents won’t stand up, students certainly will—just as they’ve driven colleges to divest from fossil fuels.

“Should anti-ESG pushback start hinting at endowments, we wouldn’t be surprised to see students uprising and demanding they be heard. After all, in recent times we have seen that they are not afraid to ask for what they believe they are entitled to: a livable planet to inhabit in the future,” Herman said.