Are anti-ESG blacklists good for state economies?

Maintaining a strong economy and a healthy business climate is an important duty for elected and public officials, and keeping a balance between regulating business practices and letting business run freely is often tricky.

States that have been trying to keep non-financial environmental, social, and governance (ESG) factors out of investment decisions have been grappling with that balance for a few years.

Some — Tennessee is a fresh example — have decided their message to investment advisers has sunk in, claimed victory, and have shifted their attention from ESG to other matters. Announcing a settlement agreement with BlackRock, a global investment management company, the state said it had “beat ESG,” signaling its willingness to move on.

Texas Comptroller Glenn Hegar said recently he’s considering taking BlackRock off the list of advisers that state won’t hire, following their high-profile withdrawal from the Net-Zero Asset Managers initiative.

Other states remain mired in litigation and legislative debate, attempting to cut their ties to banks and investment advisers they see as ESG advocates and/or practitioners.

In Missouri and Oklahoma, for example, state-imposed ESG blacklists have moved from the statehouses to the courthouses. Missouri’s anti-ESG law requiring new disclosures from brokers and advisers was found unconstitutional under federal law. An Oklahoma judge ruled that state’s law was in violation of the Oklahoma constitution because it introduced non-financial anti-ESG factors into pension decisions there, potentially harming taxpayers and retirees alike.

In those and other states, blacklists shutting out what they consider “pro-ESG” banks and investment advisers have weakened competition for public finance business, cut some of the best practitioners out of the running for that business, created obstacles for public projects and economic development, raised prices for taxpayers, lowered investment returns, and raised questions about the overall business environment.

Last May, the Texas Association of Business Chambers of Commerce Foundation commissioned a study that found that state’s anti-ESG laws could result in a loss of more than 3,000 jobs and economic losses of $668.7 million. By the time that judge ruled Oklahoma’s anti-ESG law unconstitutional, the Oklahoma Rural Association found it had already cost taxpayers $185 million.

That’s probably not what the politicians in those states set out to do. They wanted to raise the flag on cultural issues they felt had leaked into public finance. The problem is they countered with cultural – and fiscal – interference of their own. Even when it’s considered legal, it has turned out to be expensive.

The real win is walking the fine line of ensuring non-financial issues are kept out of pension investments and public finance, while still cultivating a business-friendly environment where taxpayers do not foot the bill. Tennessee seemed to figure that out, and moved on to promoting its economy and its business environment.

Other states seem to be becoming more receptive to the idea, and hopefully adopt a similar approach of moving onto other issues that won’t impose unnecessary costs of their taxpayers and state retirees.