The cost of hating on ESG
When pensions, politics and investing mix, it can get expensive for taxpayers.
Happy Finance Friday, readers! This week, the Indiana legislature gave approval to an anti-ESG bill that Republican Gov. Eric Holcolmb is expected to sign. Florida is also expected to pass a similar bill. They’re just two of a handful of red states that have taken a stand against the trend toward socially and environmentally conscious investing in recent years.
The current wave of anti-ESG legislation certainly isn’t the first time lawmakers (and other groups) have decided to specify just how exactly public fund investment officers are allowed to invest taxpayer dollars. But it might be the most costly.
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Avoiding ESG-minded companies gets expensive
Indiana’s bill would prevent the state’s pension funds from investing with firms that consider environmental, social and governance principles in their investment decisions. Florida is also poised to enact business bans related to ESG investing and both join a growing contingent of red states in doing so.
Proponents of ESG investing have long argued that not considering things like environmental and social sustainability will ultimately cost companies (and their investors) in the long-run because they will struggle to adapt to a world with more limited resources. But for some, that day may be coming a little sooner than anticipated.
Recent research suggests that anti-ESG laws may cost taxpayers hundreds of millions of dollars. The study by a coalition of nonprofits looked at six states (Florida, Kentucky, Louisiana, Missouri, Oklahoma and West Virginia) and found that ESG boycotts and blacklist legislation could lead to anywhere between $264 million and $708 million in higher borrowing costs in the bond market.
Research published last year on Texas found that anti-ESG legislation resulted in up to $500 million in higher borrowing costs for governments during the first eight months after the law went into effect.
Indiana’s legislation was initially estimated to cost its public pension fund $6.7 billion in pension investment losses over the next decade. Lawmakers then amended the bill to reduce its scope and potential cost down to $5.5 million. (Which is certainly a drop but it’s still more than zero.)
Our increasing political polarization is the root cause here and taxpayer dollars are getting caught up in the mess. It also goes beyond just climate change. Remember when Florida Gov. Ron DeSantis decided to punish Disney for its stances on social and education issues by trying to dissolve its special district? Doing so would have dumped an extra $53 million in annual debt payments onto neighboring Orange County. (This week, Disney struck back by suing DeSantis.)
Anti-ESG laws are essentially a divestment policy. And any type of politically motivated divestment risks leaving money on the table.
Consider the other side of the political spectrum and their calls for institutional investors (like state and local pension funds) to sell off equity in gun retailers, fossil fuel companies and private prisons, to name a few. But doing so has risks. A study in 2016 by the Center for Retirement Research even warned that divestment laws could hurt a pension fund’s rate of return.
In fact, CalPERS estimates that it missed about $8 billion in earnings over two decades from pulling money out of tobacco, coal, companies that manufacture guns that are illegal in California and South Africa during the apartheid era.
Those who argued against that type of divestment because it could cost more taxpayer money are some of the same lawmakers supporting anti-ESG legislation today.
Pensions’ ESG investing is about mitigating risk
Targeting one type of industry for investment doesn’t automatically mean you dump your holdings in competing industries. But often, ESG investing is framed that way: Those who seek out those investments are doing so at the expense of the fossil fuel industry.
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