Who Does Regulating ESG Help?

It seems the small government, anti-regulation crusaders are at it again. Except this time, the people who don’t want the government to regulate private industry are doing a flip-flop and doing everything in their power to regulate it. Of course, I’m talking about the urgent need of politicians to tell you how you can or can’t invest your money.

Nothing can push a staunch anti-regulation politician to change their mind like a perceived threat to their campaign contributors. Better watch out, those Environmental, Social, Governance (ESG) folks are going to drive our fossil fuel industry into the ground by not investing in the sector. We better create a regulation that limits their ability to make their own investment decisions.

Oh, there’s a risk that drought is going to have a material impact on Utah municipalities? Better go after the bond rating agencies that included this in their report because this “woke investing” is just going too far! This is despite the recent warnings from Brigham Young University that the Great Salt Lake could be dry in just five years. If the lake dries up, so potentially does the $1.4 billion skiing industry that relies on the “lake effect” snow to cushion the slopes.

Did you know that they’re actually trying to tell the insurance industry how to underwrite insurance policies? Who knows better how to gauge risk than the traditionally conservative insurance industry? Obviously, some politicians think they do.

Of course, the hypocrisy runs deep as these same industries regularly spend millions lobbying and fighting environmental and safety regulations that benefit the public, but that they fear will hurt their bottom line. Sound familiar, Norfolk Southern
NSC
?

According to the Congressional Research Service, only seven members of 535 of the previous Congress have worked in the securities industry. An additional 16 are bankers, and 18 are in the insurance industry. That’s only 7.6% of Representatives and Senators who have any experience with investments or money – but of course, they think they know better than those that have relevant experience.

This campaign against responsible investing is pandering, pure and simple. Nothing fires up the base like a good “us versus them” campaign. And the ironic part, which is usually the case, is that adding additional metrics to the investment research process would likely be of benefit to their constituents.

Anti-ESG legislation will likely cost states hundreds of millions in borrowing costs, according to a recent report. “By limiting competition for government services, states are closing the free market and passing the costs onto the taxpayer, with a methodology that does not necessarily factor these costs into the final result.” It’s clear that politicians are ultimately hurting their own constituents to mollify their industry and political donors.

Jim Jones, former Utah Attorney General and Chief Justice of the state’s Supreme Court said, “The anti-ESG bills currently pending in the Idaho Senate are fighting a losing rear-guard action for the fossil fuel industry, which has brought us great economic gains, together with tremendous environmental challenges. The time has come to embrace the future and defeat efforts to hinder forward progress.” He is spot on.

It’s important to understand that anti-ESG legislation ultimately does not accomplish anything by assuming that ESG metrics negatively affect performance. For example, a pro-ESG bill in Illinois states:

“A public agency shall prudently integrate sustainability factors into its investment decision-making, investment analysis, portfolio construction, due diligence, and investment ownership in order to maximize anticipated financial returns, minimize projected risk, and more efficiently execute its fiduciary duty.”

Notice that the goal of the policy is not social impact, but maximized financial returns and minimized risk and is meant to help the fiduciaries execute their duty. Now compare this wording with Florida’s rule,

“The board may not subordinate the interests of the participants and beneficiaries to other objectives and may not sacrifice investment return or take on additional investment risk to promote any non-pecuniary factors. The weight given to any pecuniary factor by the board should appropriately reflect a prudent assessment of its impact on risk and returns.”

Integrating ESG data into investment analysis is pecuniary and as stated in the Illinois bill, helps to maximize returns and minimize risk.

One vital thing I’ve learned from my nearly two decades of specializing in sustainable, responsible, and impact (SRI) investing, is that you can never have enough data when making securities selections. The more information, the better. Weighing not just financial risks and data, but also metrics such as climate risk and board diversity creates a much clearer picture of a potential investment. I like to call SRI enhanced due diligence investing because, ultimately, that’s what it is – a process that weighs risks and potential returns. Any politician who tells you otherwise is simply making a campaign speech.

And while it may be true that there are issues with ESG ratings consistency, the bottom line is that the additional data helps make better investment decisions. Politicians: Do you want to have a positive impact? Encourage the industry and the SEC to create and follow ESG standards.

Don’t get me wrong, I strongly believe that regulations are vital to keeping corporations in line and protecting the general public from misdeeds and bad practices. But trying to regulate responsible investing doesn’t benefit anyone. In fact, it only serves the interests of those corporate political donors and municipalities that have failed to prepare for the next economy. They want to maintain business as usual, which history suggests is a recipe for disaster. It’s protectionism at its worst.