Anti-ESG Legislation

What is ESG?

ESG stands for environmental, social and governance. The goal of ESG is to capture the non-financial or indirect financial risks and opportunities inherent to a company's operations. For example, environmental reporting might include long-term investment opportunities associated with growing industries such as clean energy, climate related risks that impact business operations, and/or information on carbon emissions. The information will inform the financial community and pension fund managers evaluating potential investments as well as consumers and partners considering doing business with an organization.

What is anti-ESG legislation?

Anti-ESG legislation refers to bills or resolutions that restrict states from contracting with financial institutions that track and report ESG metrics. These bills may 1) prohibit governments from contracting with firms that will not invest in certain industries (such as fossil fuels) by way of ESG filters or 2) prevent state pension fund managers from considering ESG metrics in their investments.

What is the threat?

Anti-ESG bills . . .

…are anti-free market.

Firms that utilize ESG metrics to guide investments merely evaluate the impact of such factors on their long-term financial health and ROI. Anti-ESG bills effectively penalize firms and investors for making prudent investment decisions in the best interests of themselves or their clients in an attempt to  force them to make investment decisions they otherwise would not under free market principles.

…deter prudent long-term risk assessments.

The largest subset of anti-ESG bills target state pension funds, which must be adept at assessing long-term risks due to the intergenerational impacts of their investments. Because pension managers must consider long-term risk in their investment decisions, many  conclude that failing to consider climate change and/or continued fossil fuel investment is a violation of their  fiduciary responsibility, to their clients - state and local government employees and retirees.

…risk significantly reducing pension returns.

For example, the Indiana Public Retirement System (INPRS) estimated that HB1008—an anti-ESG bill enacted in May 2023—could “result in reduced aggregated investment returns for defined benefit and defined contribution funds managed by INPRS by $6.7 B over the next 10 years ($6.4 B for defined benefit funds, $0.3 B for defined contribution funds). Such a decrease would reduce the estimated annual return on investment for defined benefit pensions managed by INPRS from 6.25% to 5.05%.”

…increase costs for municipalities.

Anti-ESG legislation costs states tens to hundreds of millions of dollars in bond interest payments. After key bond underwriters were forced out of the market in Texas after the passage of two anti-ESG laws in 2021, interest payments on municipal bonds grew by at least $303 million in the 8 months after the bills passed. Similar costs have been projected in other states with pending or enacted anti-ESG legislation.

…are not “anti-discrimination” bills.

Despite language prohibiting financial institutions from “discriminating” against an institution based on environmental, social, governance, or other values-based or impact criteria, anti-ESG bills weaponize anti-discrimination language to favor particular industries and limit investment criteria.

What are the models for anti-ESG legislation?