Many large banks and fund managers are beginning to consider environmental, social and governance issues alongside profitability when making investment decisions.
But then the Trump administration banned retirement funds from considering so-called ESG factors. The Biden administration has overturned that order, and the issue has recently gained attention in statehouses across the country.
Let’s start with the ABCs of ESG — what exactly is ESG? Megan Mullin, professor of public policy at the University of California, Los Angeles, says, “ESG investing incorporates environmental, social, and governance risks into investment decisions. ” states.
He said the aim is to reduce economic risks from environmental change, social disruption and social inequality. The governance part refers to how the company is run, such as CEO compensation and board diversity.
“Board structure, relationships, and shareholder voice in corporate decision-making,” Mullin explained.
ESG has finally gained acceptance as an investment approach on Wall Street. But opponents called this “investment woke.”
Last year, the state of Texas passed a law banning local governments from using 10 major banks that promote ESG policies.
Jason Isaac, a former state lawmaker who now works for the conservative Texas Public Policy Foundation, said ESG is inhibiting investment in the state’s lifeblood oil and gas industry. He called these banks “enemies” and said the state should not provide them with funds.
“It’s not a good idea to use your enemy as a weapon against you,” Isaac said. In other words, “If[financial institutions]are going to boycott Texas, Texas is going to boycott you.”
Isaac acknowledged that financial institutions banned in Texas, including BlackRock, are not boycotting fossil fuels. But activists like Isaac consider this a war. He is working with the Heritage Foundation and other national organizations to distribute model ESG ban legislation to state legislators.
According to law firm Ropes & Gray, more than 20 states are currently considering ESG restrictions in investment decisions.
But others are retreating. North Dakota’s Republican Treasurer Thomas Beadle warned state lawmakers that the regulations could scare away investors.
“We don’t want to just be cut off from investment markets in other parts of the world,” Beadle said.
Mr Beadle told MPs that it was fine for banks to have ESG funds for other clients. North Dakota won’t invest in that. He doesn’t want his hands tied by Congress.
And there is some evidence that ESG bans and bans could hurt states’ bottom lines. Daniel Garrett, who teaches finance at the Wharton School of Business, said after Texas banned these 10 banks, competition in the state’s bond market decreased and borrowing costs rose.
“This translates into an additional $300 million to $500 million in interest expense on these bonds,” Garrett said.
He said he expects more states to pass ESG investment regulations, even with the added expense.
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