Democratic treasurers defend ESG investing
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Democratic treasurers defend ESG investing

But data doesn't back up their claim that buying the stocks of ESG-oriented companies will produce better long-term investment returns.

In an open letter, 13 state treasurers and New York City’s comptroller, all Democrats, defended their environmental, social, and governance (ESG) investing goals from pushback by red-state counterparts. The Sept. 14 letter argues that government efforts to blacklist ESG-oriented financial firms are anti-competitive and would hurt taxpayers. They also assert that shares in companies acting on ESG considerations are better long-term investments.

The letter was issued by a new nonprofit organization called For The Long Term, which says it “supports state, city, county, and tribal Treasurers in managing the unique challenges they have in interfacing with each other and nonprofit organizations to support the long-term well-being of their beneficiaries.” The letter begins:

Several states in our country have started blacklisting financial firms that don’t agree with their political views. West Virginia, Idaho, Oklahoma, Texas, and Florida have created new policies and laws that restrict who they will do business with, reducing competition and restricting access to many high quality managers. This strategy has real costs that ultimately impact their taxpayers.

These blacklists are a backlash response on behalf of political and corporate interests seeking to interfere with the progress made by those of us who believe in collaboration and engagement. We work towards developing common goals, along with other investors and enlightened companies throughout the world. Our joint efforts have resulted in increased corporate responsibility, transparency, disclosure, and long term positive outcomes for the funds that we oversee, with greater benefits to employees and customers alike.    

Oregon State Treasurer Tobias Read, who signed on to the letter, also recently wrote an op-ed in The New York Times elaborating on it. Read specifically called out the implementation of a Texas law, Senate Bill (SB) 13 (2021), that prohibits the state’s pension funds from investing in firms the government deems hostile to the fossil fuel industry. As previously argued at, this legislation may end up costing taxpayers and retirees because it limits Texas pension plans’ ability to invest in Blackrock and nine other publicly-listed companies, as well as 348 mutual funds that Texas claims “boycott energy companies.”

Texas’ actions have also caused some investment banks to stop doing business with state and local governments in the state. Another Texas law, SB 19 (2021), prohibits state agencies from doing business with companies that oppose the firearms industry. 

The combined impact of Texas’ fossil fuel and firearms legislation appears to have deterred some financial firms from participating in the state’s municipal bond market. According to a working paper by the University of Pennsylvania’s Daniel Garrett and Ivan Ivanov of the Federal Reserve Bank of Chicago that was cited by Oregon Treasurer Read, Texas’ governments incurred between $303 million and $532 million in extra borrowing costs over the eight months following the effective date of SB 13 and SB 19—Sept. 1, 2021.

Garrett and Ivanov determined that five major banks exited the market for underwriting state and municipal bond offerings in Texas after that date. Those institutions are Bank of America, Citigroup, Fidelity, Goldman Sachs, and JP Morgan Chase.

Using a difference-in-differences model comparing underwriting results in Texas before and after the new laws came into effect, the researchers estimate that the reduced competition caused interest rates paid by Texas municipal bond issuers to rise 15.4 basis points (0.0154%) above what they otherwise would have been. 

With $31.7 billion of Texas municipal bond issuance in the eight months ending April 30, 2022, Garrett and Ivanov estimate that issuers will pay $532 million in extra interest over the life of the bonds, assuming they are not paid off until maturity. If instead, issuers prepay (or call) the bonds at the earliest allowable date, the extra interest would total $303 million.

Although this is not a public pension issue, this finding appears to support the contention made in the letter by the Democratic state treasurers that “new policies and laws that restrict who they will do business with” is a “strategy [that] has real costs that ultimately impact their taxpayers.”

Less convincing is the treasurers’ assertion that buying the stocks of ESG-oriented companies will produce better long-term investment returns. They claim:

Today stakeholders, customers and employees are more diverse and informed. Companies that acknowledge these changes, and incorporate strategies to capture this reality are more innovative, creative and more financially successful, consequently better investments for long term investors. Organizations that recognize the threat of climate change are already working toward reducing their carbon footprint, while the automobile manufacturers have begun rapid movement to electric vehicles. Engaged investors are working with the fossil fuel companies to help them effectively manage the energy transition, supporting their efforts to seize new opportunities in renewable energies. Doing otherwise would be a huge risk to them and their investors.

But market outcomes thus far do not appear to validate this claim. The largest US ESG Exchange Traded Fund, iShares ESG Aware MSCI USA ETF (ESGU), underperformed the S&P 500 for the 12 months ending August 31, 2022. During that one-year period, EGSU returned -13.96% compared to –11.23% for the S&P 500

Similarly, Bloomberg reports:

Global ESG funds have underperformed the broader market in the past five years, returning an average of 6.3% per year, compared with 8.9% for broader funds, according to data compiled by Bloomberg. An investor who put $10,000 into an average global ESG fund in 2017 would have $13,573 today, roughly $1,720 less than if they’d put it into a non-ESG portfolio.

In a 2019 paper, the Pacific Research Institute’s Wayne Weingarden found that the vast majority of ESG funds returned less than an S&P 500 ETF for the 10-year period ending April 2019.

The Democratic treasurers who signed the letter are right to highlight the potentially negative financial impacts of narrowing the eligibility for contractors vying to provide financial services to public entities. What remains unclear after reading both the FTLT letter and Mr. Read’s supplemental opinion, however, is how these Democratic financial officials and financial institutions can prove their preferred ESG strategies directing capital away from firearms or fossil fuels are any better for their own taxpayers and retirees.

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