As Wall Street leans further and further into socially responsible investing, one group of Texas entrepreneurs thinks it’s time for an “anti-woke” stock exchange to compete with the big guns in New York. 

The stock exchange, which so far has raised about $120 million from individual investors and investment firms and is backed by Wall Street giants BlackRock and Citadel Securities, plans to file for registration later this year, according to its chief executive, James Lee. 

Backers of the Dallas-based stock exchange promise to offer a more CEO-friendly platform with fewer environmental and social regulations, which can create higher compliance costs. That’s the case with Nasdaq’s board diversity rule, which was implemented in 2021 and stipulates that all listed companies must include one board member who identifies as female, a member of an underrepresented racial or ethnic minority, or LGBTQ+. 

The new launch comes alongside rising backlash against ESG — environmental, social, and governance — investing, also known as “socially responsible investing” or “sustainable investing,” a method that has gained traction among some of Wall Street’s largest asset management firms. 

The trendy investing method can take many forms. Some investment managers will screen out companies based on various social or environmental factors. Others will overlook bad carbon footprint numbers or a board of directors that lacks diversity if a company pledges commitment to reforming its practices. It is ultimately up to the money manager to decide what considerations go into an ESG mandate. 

Much of the criticism stems from evidence that ESG investment strategies yield lower returns than their non-socially minded counterparts. And as these funds often charge higher fees — given the additional analysis required in the investing process — ESG investments may give even less bang for your buck. 

ESG investing strategies tend to perform poorly because “the political constraints prevent investors from purchasing otherwise profitable investments and from having greater diversification, which leaves millions of dollars on the table,” the American Institute for Economic Research contends.   

As a result, ESG money managers “may be violating their fiduciary duty to get the best return for their clients by voting for radical leftist resolutions often without their consent,” the chief economist for the Institute for Economic Freedom and Opportunity, Stephen Moore, argues. 

Mr. Moore criticizes some of the largest fiduciaries for “playing politics with your pension” by adopting ESG investment methods, in spite of evidence that these strategies don’t perform as well as non-ESG funds. “This scam may be costing you tens of thousands of dollars of retirement income. Or more,” he writes. 

Others have accused ESG-minded strategies of enabling “greenwashing” — when businesses exaggerate a commitment to ESG standards to seem more socially and environmentally responsible. 

And as many ESG ratings — which sustainable money managers use to screen potential investments — focus more on relative progress than absolute impact, a company can be hailed a “sustainability leader” when in reality, it may produce just as much pollution as its lower-rated counterparts, according to research by Scientific Beta, an index provider and consulting firm. 

Several republican-governed states have already introduced legislation to limit money managers’ ability to include ESG considerations in their investment strategies, and some have even blacklisted sustainability-focused investment managers. 

Money managers have caught on to the attitude shift. BlackRock, supporter of the Texas exchange and one of the world’s largest asset management firms, recently swapped out its “ESG” investing methodology for a new approach — “transition investing.” 

While the company still identifies climate change as a generational investment opportunity, BlackRock has said that it will no longer push for companies to change corporate behaviors or promote ESG investing methods. Rather, it will follow its bet on the clean energy transition by investing in clean-energy infrastructure projects. 

Uncertainty over BlackRock’s approach remains an issue for ESG-averse investors. Back in March, a Texas school terminated an $8.5 billion contract with BlackRock after accusing the asset manager of boycotting fossil fuel energy producers, a huge industry for the state. BlackRock denied that it intentionally boycotted the industry, stating that only an insignificant amount of money was pulled. 

As Mr. Lee notes that the exchange — which will reside in a state with lower regulatory hurdles than New York and more favorable tax policies — will be “apolitical” in nature, investors grow excited at the possibility of trading on a platform that is not restricted by the “woke” regulations that strap the New York exchanges. 

According to the Texas Stock Exchange’s website, the fully electronic exchange “will focus on enabling U.S. and global companies to access U.S. equity capital markets and will provide a venue to trade and list public companies and the growing universe of exchange-traded products.” 

TXSE notes that its launch comes “as changes in the equity markets provide an opportunity for greater alignment and more competition.” 

Executing the TXSE’s vision for its future will not be an easy task. The new exchange will have to compete with the New York Stock Exchange and Nasdaq, which have an effective duopoly over the American stock market. 

Other small exchanges have entered the scene in the hopes of disrupting the existing players, but failed to gain traction. In an effort to offer an alternative to existing exchanges’ rising data fees, Members Exchange was founded in 2019. As of May, the exchange — backed by both BlackRock and Citadel — accounted for 2.4 percent of American equity volumes, far behind Nasdaq’s 14.2 percent and NYSE’s 8.5 percent. 

Mr. Lee’s exchange, though, marks a novel effort to establish a major national exchange in the Lone Star State. 

“Texas and the other states in the southeast quadrant of the U.S. have become economic powerhouses,” Mr. Lee writes in a post on his LinkedIn page. “Combined with the demand we are seeing from investors and corporations for expanded alternatives to trade and list equities, this is an opportune time to build a major, national exchange in Texas.”