As ESG faces resistance from states, Michigan should join in

19 states allege consumer fraud; Michigan bill would ban public retirement systems from ESG investing

In the past few months, the ESG movement has faced ever-increasing resistance.

In August, 19 state attorneys general, led by Missouri Attorney General Eric Schmitt, announced an investigation into Morningstar Inc.’s ESG ratings, claiming for “alleged consumer fraud or unfair trade practices.”

Morningstar, a leading financial industry publisher, reported that its “initial review was overly dismissive of the serious bias concerns” raised by third party firms. Shortly after, Morningstar discontinued one of its products, Human Rights Radar.

Texas enacted legislation last year banning state and local governments from doing business with financial firms and investment funds that, in the words of state law, “boycott energy companies.” In late August, Texas Comptroller Glenn Hegar announced the list of companies which boycott oil and gas, which included 10 financial companies and 350 investment funds.

In Florida, Gov. Ron DeSantis eliminated ESG considerations for state pension funds.

A similar bill has been introduced in Michigan. Senate Bill 1192 would ban Michigan retirement systems from ESG investing. It was introduced last month by Sen. Jim Runestad, R-White Lake, and awaits action by the Senate Finance Committee.

West Virginia is in on the fight too. State Treasurer Riley Moore denounced ESG. “Despite our state’s excellent financial position, our taxpayers could now be punished with higher borrowing costs simply because S&P doesn’t like our state’s industries and demographic profile.”

His words did not represent an empty threat. Moore barred BlackRock, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo from entering into state banking contracts with his office as a result of their ESG (and thus anti-coal) investing.

Earlier this week, Louisiana State Treasurer John Schroder announced that Louisiana will be divesting all of its treasury funds from BlackRock as a result of its push for ESG investing.

Other states, such as Indiana and Utah, have also denounced ESG publicly.

Idaho’s legislature passed an anti-ESG bill as well, specifically prohibiting public entities from using it in their investment decisions.

The pro-ESG movement, however, sees these actions as “a blackhole of misinformation and misunderstanding,” in the words of Andy Behar, CEO of non-profit organization As You Sow.

As Behar puts it, “ESG is a framework for evaluating risk. ... Any fiduciary who says ‘I’m not going to evaluate risk’ is not doing their job and should be fired.”

Writing in Harvard Business Review, Sanjai Bhagat says “Funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests.”

Bhagat cites a recent paper by Ryan Flugum of the University of Northern Iowa and Matthew Souther of the University of South Carolina, which found that “managers push for the amorphous stakeholder value-focused governance standards when their performance falls short of the objective benchmarks associated with shareholder value-focused governance.”

As a result, Bhagat concludes, “Sustainable fund managers who direct their investments to companies publicly embracing ESG principles may be over-investing in financially underperforming companies.”

Cliff Asness, founder of Applied Quantitative Research Capital Management, says that by its nature, ESG investing applies constraints on companies deemed to be undesirable on the E, S, or G dimensions.

As a result, “If two investors approach an asset manager, one who says ‘just maximize my return for the risk taken’ and the other who says ‘do that but subject to the following constraints,’ it is simply false and irresponsible for the asset manager to assert that the second investor should expect to do as well as the first, except in the case where those constraints are non-binding (and therefore not relevant). Even in that case, it’s still irresponsible to say that the second investor should expect to do better.”

To say that ESG investing is simply taking risk assessment into account is, therefore, a mischaracterization.

Michigan ought to fight against ESG as well. Pushing away from ESG is the right move for a society that values individuals and the importance of reliable energy.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.