Opinion: Environmental investing may be hurting Americans more than helping
ESG, or environment, social and governance rules for investments are distorting capitalism and misallocating money. And it could hurt Utah’s credit rating
Why is gas so expensive?
The answer is complicated, but one factor has gotten little attention — ESG. That could change before November’s election.
ESG stands for environment, social and governance, three factors many on the left, including the Biden administration, are pushing as new signals to guide investors.
To put it in layman’s terms, this is a movement to push capital away from fossil fuel production and other things considered bad for the environment and toward low-carbon, climate friendly options.
While that’s not necessarily a bad thing — renewables and electric cars are in our future, after all — the world isn’t there, yet. “So, ultimately,” Forbes energy contributor Jude Clemente wrote this week, “this Western anti-oil push is just handing a still growing oil demand market to OPEC and Russia.”
Just because fossil fuels are unpopular doesn’t mean we don’t still need them to live. The Department of Transportation says less than 3% of the cars on the road today are electric. But ESG is keeping American oil producers from receiving the investments they need to ramp up production.
Citing a Pensions & Investments Magazine figure, Utah Treasurer Marlo Oaks told the Deseret News/KSL editorial board that the number of oil and gas funds has gone from 59 funds in 2015, worth $46.6 billion, to 11 funds in 2021, worth $4.6 billion.
However, concerns about ESG go much deeper, according to Utah’s top politicians. It is a threat to the credit ratings of booming, healthy states that might not have the “correct” political views.
Last month, virtually every top Utah officeholder, from Gov. Spencer Cox to State Treasurer Oaks and the state’s entire congressional delegation signed a letter to Standard & Poor’s Global Ratings President and CEO Douglas L. Peterson, protesting S&P’s decision to use ESG credit indicators for evaluating states and their subdivisions.
Utah does well in a lot of rankings that judge states by their economic performance, the American Legislative Exchange Council ranked it as the state with the No. 1 economic outlook for 15 years straight, the unemployment rate is at 2% and Utah has been cited as the state with the smallest wealth gap, but its ESG shortcomings, S&P said, earned it a moderately negative score.
Oaks said such ratings could someday affect Utah’s triple-A bond rating, making it more expensive for the state, and ultimately its taxpayers, to borrow money.
This, he said, is “very important to us as a state.”
“Once you introduce ESG, you’re calling attention to factors that are not really financially relevant,” Oaks said. In the letter to S&P, Utah’s leaders said, “Investors or organizations like S&P Global may decide we extract ‘too much’ oil, or our gun laws are ‘too loose,’ or we are ‘too resistant’ to kindergarten sexual instruction.”
Factors such as these, Oaks said, “destroy free-market capitalism.” Investors traditionally send money into areas where needs are apparent. If the nation needs more oil production, for instance, investors profit by helping oil companies drill more, and that lowers the cost for consumers. Forcing markets elsewhere misallocates money — and results in higher prices.
Utah’s leaders aren’t fighting alone. The New York Times’ DealBook newsletter says Republicans on the House Financial Services Committee in Washington have objected to proposed new rules by the Securities and Exchange Commission to include climate-change disclosure requirements for publicly traded companies.
DealBook said conservative investors are fighting back, forming a financial firm called “Strive,” to “urge companies not to get involved in social, political or environmental issues.”
Meanwhile, however, the Department of Labor has proposed rules it says would remove barriers to ESG considerations in pension plan funds.
If anyone succeeds in condensing all of this into a bumper-sticker slogan, it could become a volatile campaign issue.
Supporters of ESG investing say the impact companies have on the environment is indeed an important economic factor. “Today, there is a growing realization among business that such ‘costs’ — typically damage to the environment, society, or both — are … deeply integral to the survival of the business itself,” Michael Chavez of Duke University wrote for Forbes.
Oaks would counter that U.S. fossil fuel production is far cleaner than that of other countries, so the planet isn’t helped by forcing capital to foreign investments.
“I don’t know of anybody who wants dirty air,” Oaks said. “This isn’t necessarily about that.”
Certainly, the world needs cleaner, more sustainable energy sources. Governments can do much, by incentivizing companies to build the infrastructure needed to service and recharge electric vehicles, or by providing credits to those who buy cleaner vehicles. Artificially pushing investors away from current market needs, however, won’t get the job done.
Nobel Prize winning economist Milton Friedman said, “The business of business is business,” or in other words, companies exist to maximize profits. That doesn’t mean investors can’t apply their own sense of ethics. Many people avoid funds that include tobacco companies or gambling ventures, for instance.
But when governments, ratings organizations and powerful investment managers start to impose ideological standards on investors, that’s an entirely different thing, especially when vibrant, prosperous states are downgraded and gas prices are pushed higher.