Imagine a small business applying for a bank loan and being rejected despite having an excellent credit rating and strong revenues.
The reason? Its “ESG” score was too low.
If you’ve never heard of ESG, you’re probably not alone. But the corporate and financial worlds are well-acquainted with it.
ESG stands for “environmental, social and governance.” Although there’s no single accepted national standard for determining ESG scores, critics contend the scoring routinely is used to rate companies on whether they have adopted certain liberal values or policies, such as reducing the effects of climate change, increasing diversity on their governing boards, and supporting social justice causes.
A company with low ESG scores might not get bank loans – or would be offered only higher interest-rate loans – or couldn’t go public because investment firms refuse to do business with them, critics say.
And critics also worry that the rating system eventually will be used against individuals seeking loans from their local bank or credit union.
“It’s the Left’s political agenda manifesting itself into a set of financial rules, and it’s tyranny,” said Curtis Loftis, the Republican state treasurer, in an interview last week with The Nerve. “It’s allowing these large, woke corporations – mainly financial corporations – to look at us and say … ‘Are they with us or are they against us? We have trillions of dollars.’”
“There’s no doubt it’s going to go to the individual (customer),” he added. “It’s only a matter of time.”
Loftis, whose office handles the sale of state bonds, said he hasn’t seen evidence that large investment firms that typically buy those bonds are using ESG scores in their purchasing decision making. But at The Nerve’s request, he provided a March 31 report from New York-based S&P Global, a financial information and analytics firm, showing that South Carolina received “neutral” ratings in the three ESG categories, which were the highest rankings given to any state.
The “neutral” rating was one step below the top “positive” rating. The worst of the five ratings was “very negative.”
Loftis, who is chairman of the State Board of Financial Institutions, spoke last week at an S.C. Senate Banking and Insurance Subcommittee hearing on a Senate bill that would require banks, credit unions and insurers to disclose if they use ESG scores or “diversity, equity, and inclusion practices” when doing business in the state.
Banks and credit unions that consider any of those factors in denying loans or charging different interest rates for similar transactions must provide “conspicuous disclosure” statements, under the bill.
“Based on implanting ESG scoring matrixes into how they do loan approvals, that’s going to seriously affect how capital flows to businesses that may be owned by conservatives or have conservative values,” Sen. Josh Kimbrell, R-Spartanburg, who co-sponsored the bill with Sen. Sean Bennett, R-Dorchester, said when contacted this week by The Nerve. Bennett and Kimbrell are Banking and Insurance Committee members.
“I’m deeply worried,” Kimbrell continued, “about the notion of any type of banking entity that’s going to be using environmental, social, governance scores to be making a determination as to whether you’re credit worthy or whether you get a government contract.”
Kimbrell, who noted he previously worked as a commercial banker for more than 10 years, acknowledged that the bill, which was introduced on March 31, likely won’t pass this year, though he added he is working on “more far-reaching legislation” for next year to “prohibit the inclusion of an ESG matrix into the credit approval process for any bank headquartered or which operates in South Carolina.”
South Carolina Bankers Association president and CEO Fred Green, who spoke at last week’s subcommittee hearing, doesn’t believe the legislation is necessary.
“When I first saw the bill, my first thought was, ‘Banks, No. 1, don’t do it (use ESG scores); and No. 2, can’t do it,’” he said when contacted this week by The Nerve.
Green, who noted he was in the banking business for “40-some” years, most of it “in the senior ranks of running a bank,” said his organization polled approximately 70 banks that do business in the state – about 40 of which are headquartered in South Carolina and the remainder based out of state – asking them whether they currently are using ESG scores and whether they intend to do so in the future.
“There was 100% response, and the response was ‘no’ and ‘no,’” he said.
Kimbrell said, though, “essentially some whistleblowers at other banks” have told him that “our banks are talking about how they are into it (ESG scores),” adding, “So it’s not theoretical; it’s happening.”
Based on an example given by The Nerve, Green said if a person with excellent credit and a steady job is denied a bank loan solely because he held very conservative political views, the bank likely would be violating the federal fair lending law and Community Reinvestment Act, noting he cited the laws at last week’s subcommittee hearing.
“Those two things alone keep everything fair,” he said.
But Kimbrell doesn’t believe there is a level financial playing field in South Carolina.
“They all know this is on our radar screen,” he said. “I think it has a deterrent effect just to have a hearing.”
The Senate bill wasn’t the only ESG-related legislation introduced this year.
Under a House bill sponsored by Rep. Anne Thayer, R-Anderson, and co-sponsored by 31 other Republicans, banks and other financial institutions doing business in the state couldn’t discriminate against individuals or businesses based on “subjective or arbitrary standards such as social media posts; participation or membership in any clubs, associations, or unions; political affiliation; employer; or other social credit, environmental, social, and governance, or similar values-based or impact criteria.”
Banks or credit unions that violated the new law would be subject to a $50,000 fine for a first offense and a $250,000 fine for a second and subsequent offense, with fines doubling for subsequent offenses after five violations.
The bill also generally would ban “all private businesses” in the state from discriminating against individuals and other businesses based on the same factors in the section dealing with banks and other financial institutions, unless the “practice is fully disclosed to the potential consumer before the consumer and business enter into any business transaction.”
“It’s definitely an ESG bill, if you will,” Thayer told The Nerve when contacted Thursday.
In researching her bill, Thayer said she was surprised to learn how prevalent ESG scoring is in the business world, citing Duke Energy as an example. In a “sustainability” report posted on its website, Duke listed ESG scores from several rating companies, noting, for example, that the “Bloomberg ESG Disclosure Score” last year was 61.89 out of a possible best 100, which was the “highest score for our peer U.S. utilities.”
“To drive continuous improvement, Duke Energy benchmarks its environmental, social and governance (ESG) practices against best-in-class and peer companies,” the report said.
As with the Senate bill, Thayer acknowledged that her bill, which was introduced on Feb. 15, has little chance of passing this year, noting no hearing has been held yet. But she added it could be used as an “educational tool” before being resubmitted next year.
Thayer said she hopes other states will adopt similar legislation, and that the ESG issue “needs to be addressed nationally as well.”
“As woke as we’re becoming as a country, I feel it’s going to be used against us if we don’t do something about it,” she said.