After years of headlines about the growing environmental, social and governance (ESG) movement in investing, ESG has met with understandable skepticism from taxpayers, who underwrite state and local government pension plans and loans. governmental. After all, if the managers of these operations stop focusing on properly balancing risk and return, instead pursuing ideological investment objectives, taxpayers could be hit with hundreds of billions in additional liabilities. However, that approach must go both ways. Force these managers to reflexively adopt ESG criteria either Reflexively rejecting it could deprive taxpayers of the market-based innovation, resilience and long-term value we count on to avoid a financial crisis.
According to a report from the Council of State Governments, at the state level alone taxpayers face $1.3 trillion in unfunded liabilities from government employee pension systems. The administrators of these pension plans need all the tools at their disposal to protect taxpayers against massive bailouts. Passing restrictive laws at the federal or state level, instructing these managers to avoid certain industries or banks perceived as too “woke” or not “woke” enough, could place them in a fiscally unsustainable position.
The financial contagion caused by pro- and anti-ESG actors is already spreading to another area of public finance. In several cases, the politically motivated pursuit of non-financial outcomes has led to lower investment returns, market distortions, and other forms of economic harm.
When Texas passed a law in 2021 that prohibited municipalities from working with banks that adopted risk mitigation policies related to fossil fuels and firearms, researchers at Wharton Business School found that it boosted five of the state’s largest insurers. to exit the market. That decreased local competition for borrowing and raised rates, costing taxpayers an additional $532 million in interest over eight months.
Last year in Stillwater, Oklahoma, when the City Council tried to borrow money from Bank of America for a major infrastructure project, the state treasurer added Bank of America to a blacklist of companies he said were boycotting the fossil fuels. The measure forced the city to look for a new financier, who The Oklahoman reported ended up providing a higher interest rate. The result was $1.2 million in additional costs to local taxpayers.
At its core, the free market thrives on competition, efficiency and adaptability. ESG investing can coexist harmoniously with these principles. By working with investors, companies can choose to voluntarily adopt sustainable practices and prioritize ethical governance, while ensuring the freedom to make investment decisions that allow companies to improve their overall performance.
At the same time, companies that invest in resource-efficient practices, such as renewable energy, can drive innovations that generate financial returns through cost savings, greater operational efficiency, and staying ahead of regulatory changes.
Additionally, companies that conduct robust ESG analysis may be more resilient and better prepared to manage environmental and social risks outside their control, reducing the likelihood of negative events that could impact financial performance. The bottom line: companies should be free to make – or not make – ESG investments.
The recent spate of bipartisan efforts to divert government business from companies with which they have political disagreements poses a significant risk to taxpayers and their investments. That’s why we recently joined a group of center-right taxpayer advocates to outline a set of common-sense investment principles for policymakers. These include:
- Reject Big Government interventions. Promote limited government and pro-growth policies that eliminate bureaucracy and reduce tax burdens.
- Protect pensions and investments from politicization. Do not prohibit or require certain types of decisions that are outside the scope of maximizing the return on investments in the free market.
- Ensure that fiduciaries comply with the duty of care and loyalty at all times and act in the interests of their clients.
- Remove the shackles of government and allow businesses, pension funds and individuals to responsibly plan for future uncertainties in a time of rising prices and rising debt.
- Foster business-friendly environments with informed and free-flowing capital.
- Allow companies to voluntarily adopt sustainable workforce or operating practices without government interference.
- Keep government out of boardrooms and reject politically motivated efforts to divert government business away from or toward certain companies based on narrow political agendas.
Governments should neither require nor prohibit ESG investing. By adopting common-sense investment principles within the framework of the free market, state and federal policymakers will help advance policies capable of meeting the changing needs and expectations of the American people and driving sustainable economic growth.
Carlos Curbelo served as U.S. Representative for Florida’s 26th congressional district from 2015 to 2019. Pete Sepp is president of the National Taxpayers Union.
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