The Securities and Exchange Commission is slated to soon release mandatory disclosure rules for environmental, social and governance policies that are expected to require companies to report climate-related risks likely to have a material impact on their businesses. It is unclear whether compliance with these rules will be merely onerous, or absolutely unreasonable. On the flip side, many state policymakers have been crafting proposals to prevent their states from contracting with companies that practice ESG.
Ironically, these policies will have the same effect as the heavy-handed federal government regulations they’re rebelling against: micromanaging U.S. businesses and adding significant, unnecessary costs to achieve ideological aims. Think of it as right-wing ESG.
For example, in 2021 Texas enacted laws prohibiting municipalities from contracting with banks with particular ESG policies, specifically those that prohibited investment in fossil fuel companies. While many supported this policy, believing it would protect Texas’ fossil fuel production, policymakers were less than transparent with voters about the costs—much of which taxpayers will bear. In the aftermath of the Texas law, five of the largest municipal bond underwriters stopped doing business in the state, unable or unwilling to comply with the restrictions.
We’ve seen this movie before: California is notorious for crafting regulations that force businesses to flee the state. Texas’ anti-ESG laws are certain to have the same effect. Research conducted by economists at University of Pennsylvania’s Wharton business school and the Federal Reserve Bank of Chicago found that Texas’ anti-ESG laws will cost issuers between $300 million and $500 million in additional expenses in just the first year of their implementation.
More broadly, drafts of various anti-ESG laws passed in the states suggested such legislation would cost billions of dollars for taxpayers and retirees who rely on a competitive bidding process to secure the best deal at the lowest price. By restricting the participation of some of the largest banks and financial-services providers for pursuing ESG policies—even if these companies provide the best services at the lowest costs—some states are limiting competition and raising taxpayers’ costs. When certain competitors are removed from the market by government fiat, quality is sure to decrease, and costs to increase. This was once something conservatives understood well.
In Oklahoma, too, anti-ESG policies are likely to harm taxpayers and retirees. The state has released a “boycott” list of financial-services companies believed to be boycotting the oil and gas industry. The list includes banks and asset managers with large footprints in the state, providing access to capital for dozens of towns and managing the retirement plans for thousands of residents. Even if voters agree with the aim of protecting one of the state’s key industries, taxpayers should be made aware of the criteria for inclusion on the list, as well as the likely costs they will face from implementing these measures.
Indeed, these policies have already imposed costs on the state’s taxpayers. For example, officials in Stillwater were forced to freeze a series of infrastructure projects after much higher bank loan fees were realized because the lender found itself on Oklahoma’s list. The next-best lender would cost the town $1.2 million in additional costs. Switching from some of the largest asset managers in the state would have a significant cost to pension systems such as Oklahoma Public Pension Employees Retirement System. OPERS staff estimated a loss of at least $10 million, and possibly more, due to lower performance. Moreover, its board determined that divestment would be “inconsistent with its fiduciary responsibility.”
States certainly have the right to pursue such policies. But anti-ESG laws are typically imposed without a clear identification to taxpayers of the trade-offs involved, even when those trade-offs are significant. Economic conservatives have traditionally relied on market forces to discipline firms adopting expensive ESG policies. If companies’ ESG programs add onerous costs to achieve aims customers do not value, those customers take their business elsewhere. But rather than allowing this market-based process to occur, states are using government power to force the outcome they prefer.
It might be politically fashionable to pursue anti-ESG policies in some states, but governments need to be transparent that they come with hefty costs. And while it should be obvious to conservative policymakers that shutting down competition in the service of ideological ends invariably produces higher costs and lower quality, it’s not too late to get back on track. The best course is for governments—at all levels—to allow the private sector and market forces to work.
Douglas Holtz-Eakin is president of the American Action Forum and was chief economic policy adviser to Senator John McCain's presidential campaign.
This article was provided by Bloomberg News.