The ESG (environmental, social, and governance) movement in investing has garnered attention, but taxpayers remain skeptical. They worry that if pension plan managers prioritize ideological investment goals over risk-return balance, taxpayers could face substantial additional liabilities. However, a one-sided approach—either reflexively embracing or shunning ESG—could hinder market-based innovation and long-term value.
At the state level, taxpayers grapple with $1.3 trillion in unfunded liabilities from government employee pension systems. Administrators need tools to protect against massive bailouts. Restrictive laws, instructing them to avoid certain industries or banks based on perceived “wokeness,” could strain their fiscal position.
The financial impact of pro and anti-ESG actions extends beyond investing. Pursuing politically motivated outcomes has led to diminished returns and market distortions. For instance, Texas’s 2021 law banning municipal collaboration with banks implementing fossil fuel and firearm risk mitigation policies resulted in decreased local competition for borrowing and $532 million in additional interest costs for taxpayers over eight months1.
Taxpayers’ interests lie in a balanced approach that considers both ESG and fiscal responsibility.
Last year, in Stillwater, Oklahoma, when the City Council aimed to borrow funds from Bank of America for a significant infrastructure project. However, the state treasurer blacklisted Bank of America, alleging that the bank boycotted fossil fuels. Consequently, the city had to seek an alternative financier, resulting in a higher interest rate. This decision imposed an additional cost of $1.2 million on local taxpayers.
The free market thrives on competition, efficiency, and adaptability. ESG investing can coexist harmoniously with these principles. Companies can voluntarily adopt sustainable practices and prioritize ethical governance while maintaining the freedom to make investment decisions that enhance overall performance.
Additionally, investing in resource-efficient practices, such as renewable energy, drives innovations that yield financial returns through cost savings, improved efficiency, and staying ahead of regulatory changes.
Companies that engage in robust ESG analysis can enhance their resilience and preparedness to manage environmental and social risks beyond their control. This reduces the likelihood of negative events impacting financial performance. The bottom line: companies should have the freedom to pursue—or not pursue—ESG investing.
However, bipartisan efforts to steer government business away from companies based on political disagreements pose a significant risk to taxpayers and their investments. To address this, a group of center-right taxpayer advocates recently outlined commonsense investing principles for policymakers. These principles emphasize the importance of balancing ESG considerations with fiscal responsibility. These include:
- Reject Big Government interventions. Promote limited-government and pro-growth policies that eliminate red tape and reduce tax burdens.
- Protect pensions and investments from politicization. Do not ban nor mandate certain types of decisions that are outside the realm of maximizing return on investments in the free market.
- Ensure fiduciaries uphold 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 increased debt.
- Encourage business-friendly environments with free-flowing and informed capital.
- Allow businesses to voluntarily adopt sustainable workforce or operational practices without government interference.
- Keep the government out of boardrooms and reject politically motivated efforts to steer government business away from or towards certain companies based on narrow political agendas.
ESG investing should neither be mandated nor prohibited by governments. By adopting commonsense investing principles within the free market framework, state and federal legislators can promote policies that address evolving needs and expectations while fostering sustainable economic growth
Tran Dung/ATES GLOBAL
Source: Fortune
