Join me for Episode 111 of the Let People Prosper Show with Dr. Paul Tice, Adjunct Professor of Finance at the Leonard N. Stern School of Business at New York University, to hear his take on the costs of ESG actions and mandates on energy and our future from his book “The Race to Zero.”
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Originally published at Pelican Institute.
Environmental, Social, and Governance (ESG) investing has gained popularity for promoting environmental sustainability, social justice, and ethical governance. However, this approach often leads to lower investment returns, significantly impacting taxpayers and the economy. In states like Louisiana, where the oil and gas industry is crucial for economic stability, mandating ESG investing could have serious consequences. Governments must focus on maximizing fiduciary responsibilities over politically driven ESG criteria to ensure the highest returns for public funds. Louisiana’s economy heavily relies on oil and gas activities. According to the U.S. Energy Information Administration (EIA), Louisiana is a leading crude oil and natural gas producer, contributing substantially to the state’s economic output. The state has substantial refining capacity, with some of the nation’s largest refineries located along its Gulf Coast. Imposing ESG mandates can disrupt this critical sector, potentially reducing economic growth and increasing consumer costs. Louisiana risks undermining its economic foundation by diverting investments to ESG funds, which often underperform compared to traditional indices. Recognizing these economic threats, Louisiana has taken proactive steps to protect its financial interests. In 2022, the Louisiana Treasurer announced a plan to divest state funds from BlackRock, citing concerns over the company’s focus on ESG criteria that conflict with the state’s economic interests. This plan included removing $794 million from BlackRock funds. This underscores Louisiana’s commitment to prioritizing financial returns and protecting the state’s vital oil and gas industry from the negative impacts of ESG-driven investment strategies. This year, Louisiana passed SB234, prohibiting state and local government entities from contracting with entities that discriminate against firearm dealers and ammunition industries. Texas and Oklahoma have taken similar stances against ESG investing. Texas passed Senate Bills 13 and 19 in 2021, prohibiting state investments in companies that boycott firearm and ammunition industries or fossil fuels, respectively. These laws help preserve economic interests and keep public funds from chasing poor returns. Similarly, Oklahoma passed the Energy Discrimination Elimination Act (EDEA) in 2022 to protect its vital oil and gas sector from the adverse effects of ESG investing. This Act restricts state and local governments from contracting with financial firms that boycott energy companies and ensures that investment decisions are based on financial merit rather than political considerations. The pushback against ESG mandates is not limited to Texas, Oklahoma, and Louisiana. Across the United States, states are grappling with the implications of taxpayer funding for ESG activities. A state-by-state snapshot of the ESG policy landscape reveals a growing trend of legislative actions to curb ESG investing. States like Florida and West Virginia have also passed laws to prevent state funds from being used for ESG investments. A study by the Committee to Unleash Prosperity reveals that ESG investing often results in lower financial returns. This finding supports the argument that ESG criteria should not drive public investment strategies. Additionally, research from the Center for Retirement Research shows that ESG investments underperform compared to traditional indices, further questioning the efficacy of ESG mandates. Investment managers for state and local funds, such as public pensions for teachers and state employees, have a fiduciary duty to ensure the highest rate of return. ESG investing often conflicts with this duty by prioritizing non-financial criteria, leading to lower returns. The legislative actions in Louisiana, Texas, and Oklahoma exemplify how state policy can safeguard scarce taxpayer resources. The opportunity costs of ESG investing are significant. Diverting funds from high-performing investments in traditional energy sectors to ESG projects can result in lower economic growth and higher consumer costs. In Louisiana, where the oil and gas industry is a cornerstone of the economy, such a shift can lead to job losses, reduced economic activity, and lower tax revenues, ultimately harming the communities that ESG policies aim to protect. Policymakers in Louisiana and other states should continue prioritizing fiduciary responsibilities and avoiding ESG investments that do not serve the best interests of taxpayers. Transparent and independent audits of investment decisions can ensure that public funds are managed responsibly, promoting economic growth and stability. While ESG investing is acceptable for the private sector, given that individuals can choose what to invest in and take on whatever amount of risk makes sense for them, the government has no money, so it should use taxpayer dollars as conservatively as possible. Your browser does not support viewing this document. Click here to download the document. Originally published at American Energy Institute.
Originally published by American Energy Institute. Your browser does not support viewing inline PDFs. Click here to view the PDF. Originally published at OCPA.
In 2022, Oklahoma lawmakers passed the state’s “Energy Discrimination Elimination Act” (EDEA), which requires the office of the state treasurer to conduct a review of firms to identify those that boycott investments in oil-and-gas companies due to their embrace of so-called “Environmental Social Governance” (ESG) policies. State entities, including state pension funds, cannot contract with firms on that list. In April, the Oklahoma Rural Association released a study that claimed the Energy Discrimination Elimination Act has increased municipal borrowing costs by 15.7 percent. But now a new study, released by the American Energy Institute, has examined the Oklahoma Rural Association’s work and found it riddled with flaws and omissions that skewed its findings. “As we release this comprehensive analysis, it’s clear that the Energy Discrimination Elimination Act of 2022 is crucial for safeguarding Oklahoma’s economic interests and ensuring sound fiduciary practices,” said Jason Isaac, CEO of the American Energy Institute. “Our research debunks the flawed claims against the EDEA, highlighting its role in protecting vital energy sectors and promoting financial stability for the state.” “Fact versus Fiction: Examining Oklahoma’s Energy Discrimination Elimination Act of 2022” was authored by Vance Ginn, former chief economist of the White House’s Office of Management and Budget and a fellow at the American Energy Institute, and Byron Schlomach, an economist with 30 years’ experience in state-level public policy who served on the Piedmont City Council and was the director of the 1889 Institute in Oklahoma. The two men examined the “Energy Discrimination Elimination Act” and the Oklahoma Rural Association’s critique of the law, and found the critique deeply flawed. “The Oklahoma Rural Association’s report on the state’s Energy Discrimination Elimination Act and its purported impact on municipal borrowing costs contains significant methodological flaws,” Ginn and Schlomach write. “It fails to establish a causal relationship between the EDEA and higher municipal borrowing costs. Changes in federal policy with respect to the oil industry, first positive under President Trump and now decidedly negative under President Biden, are more plausible explanations for Oklahoma’s relatively increased borrowing costs. Furthermore, the push towards ESG investing overlooks the opportunity costs associated with divesting from reliable energy sources like oil and gas, which are crucial to Oklahoma’s economy.” Due to the flaws in the Oklahoma Rural Association study, Ginn and Schlomach conclude that it “should not be used as a reason to question or delay the implementation of protections put in place by the elected representatives of states like Oklahoma and Texas against asset managers using the assets of those states to push ESG-aligned political objectives.” Instead, they write that policymakers should “ensure that investment decisions prioritize profitability and fiduciary responsibilities over politically driven, subjective ESG criteria through increased transparency, independent audits, and clear rules. This approach will better safeguard economic interests and promote sustainable growth, benefiting the broader community and the environment.” Among the problems that Ginn and Schlomach identify in the Oklahoma Rural Association report is the fact that a comparison of Oklahoma municipal bonds with a national index “shows Oklahoma’s interest rates varied by less since September 2022, before the law went into effect in November 2022 and when the Treasurer issued the restricted financial companies list in May 2023.” “This indicates that EDEA did not cause interest rate movements and that the paper’s results come from cherry-picking the data and specific states,” Ginn and Schlomach write. The two economists also write that the Oklahoma Rural Association report overlooked other important factors, “such as the upward trend in interest rates,” and also contained “methodological challenges of correlation versus causation.” The Oklahoma Rural Association’s report claims the EDEA has increased municipal borrowing costs by approximately 59 basis points (0.59 percent), a 15.7 percent increase compared to some states, and attributes that increase to reduced financial competition that the report suggests has been created by the EDEA. However, Ginn and Schlomach note that the Oklahoma Rural Association report notably omitted New Mexico from the selected neighboring states examined, “raising questions about whether the chosen states moved in parallel with Oklahoma before the EDEA’s implementation.” In addition, they note that “a substantial outflow of funds from municipal bonds” occurred nationwide in 2022 and 2023. Ginn and Schlomach note that Oklahoma’s municipal borrowing interest rates were “trending upward long before the EDEA’s passage and implementation.” And the two economists argue that the Oklahoma Rural Association report fails to address the negative impact of ESG investing strategies on Oklahoma. “Divesting from reliable energy sources like oil and gas in favor of renewable energy projects often result in lower returns and economic disruptions,” Ginn and Schlomach write. “States with significant economic output from the oil and gas sector, such as Oklahoma and Texas, face significant spillover effects from reduced investment in these industries. These spillover effects include job losses, reduced economic activity, and lower tax revenues, which ultimately create ripple effects on the broader state economy.” Further, using ESG criteria in public pension funds and state investments “can lead to lower financial performance and increased risks, as highlighted by critiques and evidence.” “EDEA is specifically designed to counteract the growing trend among financial institutions to shun investments in fossil fuel industries due to ESG pressures,” Ginn and Schlomach write. “By enforcing this law, Oklahoma ensures that its oil and gas sectors, which are crucial to its economy, remain robust and well-funded.” |
Vance Ginn, Ph.D.
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