These days, the news constantly features headlines on how environmental, social, and governance (ESG) trends are shaping the financial world. This debate is not only being had by the media but in state capitals across the country that have also witnessed a host of major political battles over ESG policies. As combatants on both the left and right have enacted laws and regulations to reinforce their positions, ultimately taxpayers could find themselves on the losing end.
On the left, blue states are enacting policies to punish companies and institutions that do business with industries like tobacco, energy, and firearms. On the right, red states are fighting back with policies to punish companies and financial institutions that have gone “woke.”
Stuck in the middle are taxpayers. As more and more financial institutions are barred from doing business with a state government, the end result is fewer options for government financing and contracting. This, of course, means costs necessarily increase; forcing taxpayers to pick up the tab. Indeed, a study by economists at Penn Wharton estimated that a Texas law to fight back against ESG policies could cost taxpayers in the Lone Star State as much as $532 million in higher interest costs in just 8 months. On the other side of the coin, research shows that public pension funds with ESG investment mandates have investment returns that are 70 to 90 basis points lower than those that do not; meaning retirees are financially hurt by these investment strategies.
Poicymakers shouldn’t steer government business away from companies with which they have political disagreements. Just as they shouldn’t steer government business toward companies that they like. The same goes for government-funded pension systems, which shouldn't face pressures that take the focus off sound, unbiased financial management. Doing so wastes taxpayer dollars and serves as a breeding ground for corruption. Instead – with a few exceptions in egregious circumstances like violations of federal law – government officials should fulfill their fiduciary obligations to taxpayers by securing the best goods and services at the lowest possible cost.