ESG is the free market, not political food

Fear of extreme weather conditions and civic unrest has inspired investors of all sizes to buy environmental, social and governance (ESG) stocks. The global The ESG market has grown from $ 19 trillion in 2014 to $ 55 trillion forecast in 2022 due to such incredible demand.

Banks have responded appropriately by making it easier to invest in a greener and fairer world with dedicated ESG funds. Corporations and governments have more frequently added a green or social label to their bond issues to attract investor interest by reducing interest costs.

The rise in ESG investment exemplifies supply that meets demand in the free market, but some conservative leaders seem to have forgotten their Econ 101. Instead of recognizing the growth of ESG as an apolitical result of the free market, they are attempting to intervene. through partisan rhetoric without any rational basis. Their proposals would increase costs for taxpayers by diverting investment from good causes: a double whammy.

Florida Governor Ron DeSantis is the latest unquestioned critic. Last month, him passed a resolution direct state pensions to prioritize “the highest return on investment for Florida taxpayers and retirees without considering the ideological agenda of the environmental, social and corporate governance (ESG) movement.”

Ironically, ESG investing did above-average returns as customers reward companies that respect the environment and society. Which means Florida pension funds may not even change their holdings. If they do, they will likely earn less and harm their retirees and taxpayers.

More dangerous are the anti-ESG laws enacted by Texas and many other states that seek to ban banks that have increased ESG practices in response to market demand. Texas lawmakers have made it illegal for local governments to do business with financial companies that have policies that limit exposure to fossil fuel industry, responding to an increasingly common stance inspired by climate-conscious investors.

Texas has taken a further and more illogical step with a law that attempts to protect the arms industry at the expense of taxpayers. Many large banks have implemented policies not to invest in certain arms manufacturers or dealers that sell military-style weapons to civilians without responsible practices, such as background checks.

Texas’ decision to ban these banks limits competition by hindering the free market. With a smaller pool of financial firms driving prices up, Daniel Garrett of the University of Pennsylvania determined that Texas residents are paying $ 303 million to $ 532 million more in loan costs!

Oddly enough, the anti-gun stance of banks doesn’t even fall within the definition of ESG, which means investing in projects or companies with a positive impact on the environment or society. Companies that decide not to act in a way that could harm their communities are not really ESG, they are simply responsible business behavior.

Despite the claims of some conservatives, it is not true that companies should prioritize profit above all else. Check out pharmaceutical companies like Purdue Pharma return billions of dollars to victims of opioid addiction. Just like individual citizens, businesses have an obligation not to actively harm people.

In a May editorial, Vice President Mike Pence argued that the GOP should “work to end the use of ESG principles at the national level”. He says: “For the free market to thrive, it must be truly free.” But how does urging lawmakers to forcibly prevent people from investing in what they want (ESG) make the market free? It is not so. It is the exact opposite.

His argument misunderstands investor demand and law-abiding behavior with a supposed radical agenda; but the logic does not hold. If Pence really wants the market to be free, he would recognize banks ‘ESG practices as a rational response to their customers’ demand. The only program driven by an extreme ideology is vitriol against ESG and it poses a dangerous threat.

Pence and others want to stop ESG’s significant growth, but that would mean tampering with the free market, not protecting it. And what is their reason? Do they want to make it more difficult for people to invest in green projects or buy shares in companies that promote social responsibility?

What else would right-wing extremists try to outlaw with this inaccurate and irrational argument? Would they attack companies with different hiring practices that give opportunities to racial minorities? Would they have a backlash against companies that support LGBTQ + employees? Over 90% of Fortune 500 companies protect LGBTQ + employees from discrimination.

But Pence and DeSantis don’t care about the majority. The argument against ESG has no basis in free market ideology. They are only interested in imposing their political beliefs on others at any cost. And that cost would be huge.

Kevin Bain is the debt manager for the city of Detroit and a partner in Better World Finance LLC. You have a Masters in Public Policy from Harvard Kennedy School of Government.


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