Ron DeSantis' proposed ban on ESG investments would be another blow for diverse fund managers

Florida Governor Ron DeSantis is taking aim at ESG investing as part of his ongoing war on things he considers "woke." While the Florida executive is popular with his base, his work to discredit ESG investing could prove detrimental to the startup investing landscape, especially for diverse founders and fund managers.

In late July, DeSantis released a statement announcing a proposal to ban State Board of Administration (SBA) fund managers — the people who manage Florida’s $200 billion reserve from the Florida Retirement System — from taking environmental, social and governance (ESG) factors into account when investing.

A spokesperson for the governor’s office confirmed to TechCrunch the topic was on the agenda for discussion at yesterday’s Florida cabinet meeting, paving the way for the proposed restrictions to become a reality. This move could have a damaging impact on the amount of capital allocated to founders advocating for diversity, equity and inclusion, as well as diverse venture fund managers -- and therefore diverse founders. This is because it moves the focus away from the importance of investing in these entrepreneurs, possibly diminishing any extra attention ESG efforts provided in what is already a fraught landscape.

Calls for ESG investing have increased as the climate crisis worsens and women and minorities continue raising minuscule amounts of venture capital funding. TechCrunch even pondered whether reproductive rights should be considered under the ESG fold. Many industry experts agreed that it should. Yet, as diversity, equity and climate change remain weaponized right-wing issues, some Republicans now see ESG as a threat.

In a statement, DeSantis referred to ESG investing as a danger to economic freedom, claiming it targets “disfavored individuals and industries to advance a woke ideological agenda.” He said he’s protecting Floridians from “woke capital” by asserting constitutional authority over “ideological corporate power.” He’s hardly alone on that front — Texas and West Virginia have looked at punishing companies that move away from fossil fuels, a core goal of ESG investing.

Furthermore, a one-pager by the governor’s office called ESG investors “corporate cartel elites” and suggested that the real victims of this investing methodology were soon-to-be retirees, those who support the Second Amendment, conservatives, Americans with firmly held “religious beliefs,” victims of the “Biden Border Crisis” and Americans who “fill up their gas tanks,” the latter referring to the ESG goal of reducing dependence on fossil fuels.

It’s unsurprising that his proposal comes as founders and investors have called on limited partners, like pension funds, to be held more accountable for where their money goes. In a way, DeSantis is protected by the fact that ESG investing is not regulated by any sole governing body, meaning he can easily take the first punch in systematizing such standards.

“What DeSantis is doing is codifying a practice that already exists — blatant discrimination against underrepresented fund managers,” Backstage Capital general partner Christie Pitts told TechCrunch. “Stodgy asset allocators have been resistant to change, and announcements like this one let them breathe a sigh of relief. They can continue to operate with the status quo.”

The proposed legislation would amend Florida’s Deceptive and Unfair Trade Practices statute, and the governor said violators would be punished according to the law, which, right now, includes a $10,000 penalty, attorney fees and other costs. DeSantis also plans to work with “like-minded states” to implement similar measures.

RareBreed Ventures founder McKeever Conwell told TechCrunch that though these measures could be tricky to enforce, they could lead to fear in investing in diverse founders, thus contributing to a lack of funding for overlooked entrepreneurs. Data is sparse, but Pitts added that ESG investing was still only just starting to be considered by many asset allocators, meaning it was in the early phases of actually being executed for diverse founders in particular. This proposal could nip that in the bud.

“If you had a situation where there was a pension fund that was under these rules and all of a sudden, that portfolio started to look more and more diverse, that may now be a red flag,” Conwell said. “When the auditors come in to check the pension funds, they’re going to be checking for things like that.”

"It's a dog whistle"

Fund managers, the majority of whom are white, have managed to allocate a stunning majority of venture capital funds to men, the majority of whom are also white. Contributors to the Florida pension funds, many of whom are considered working class, do not have a say in where their money goes. Current investment statistics support the likelihood that Florida pension workers have been funding the startup dreams of white men for decades.

“Without federal regulation and better oversight of ESG, change will happen only on an allocator-by-allocator level, so very slowly, if at all,” Pitts said. “The people that are truly harmed are the everyday working-class folks that contributed to the pensions in the first place.”

Zane Venture general partner Shila Nieves Burney, based in Atlanta, has had her money in the Florida pension system for 30 years after retiring as an administrator in Central Florida. She told TechCrunch she would love for ESG to be considered when having her money invested and called it “sad” that DeSantis doesn’t feel the same way.

“We will go backward if we decide to remove the ESG component of investing because there are so many incredible companies out there that could benefit from this funding,” Burney said. “To remove that layer, we go back to pattern matching,” a method of making investment choices that often reinforces the power of existing in-groups, often to the exclusion of minority founders and women.

Pitts agreed, saying the proposal will be another systemic barrier that further complicates giving money to underrepresented fund managers.

She also noted that funds led by a diverse founder routinely outperform those led by their white counterparts and that the continued investment of Florida pension money into funds led by white men is a knowing investment into an underperforming asset. To be fair, not taking ESG into consideration doesn’t necessarily mean minority fund managers won’t raise from the Florida pension fund, it just means it is less likely. There’s also the worry that a ban on considering ESG principles when making investment choices could impact other investment initiatives and sway the hearts of those already on the fence about ESG investing.

“When underrepresented fund managers struggle to access capital, fewer underrepresented founders receive funding,” Pitts said. “This is a complex issue that is being reduced to identity politics. It’s a dog whistle. Other states and organizations will follow suit.”

Conwell said that this proposal is likely just DeSantis pandering to his conservative base as he mulls a presidential run. In the past year, the governor signed a bill to limit the discussion of race in the classroom and another that bars teachers from speaking about sexual or gender orientation at schools. Florida voters headed to the polls for the primaries yesterday, coincidentally the day of the cabinet meeting where DeSantis officially proposed this idea. Republicans fared well, and DeSantis won the GOP primary last night, unopposed.

For those looking to combat these types of restrictions, Conwell said it's best to start calling for legislation that embraces ESG investing. Pitt added that “forward-looking states” and asset allocators should hire more diverse fund managers to prove the Florida proposal is “myopic.”

In the end, a potential ban like this isn't the least bit surprising; after all, Conwell notes that Republicans have toiled for decades to discredit efforts to assist overlooked and underrepresented people.

“Those who are in power, who do not want to see other individuals progress, have been negatively impacting their companies for the sake of keeping power for a long time,” he said, comparing it to a time when Black players were once barred from basketball. “This is no different.”

Correction: a previous version of this story stated Burney was a teacher in Central Florida. She was an administrator.