ESG is the free market, not political fodder

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

Banks have appropriately responded by making it easier to invest in a greener and more equitable world with ESG dedicated funds. Companies and governments have more frequently added a green or social label to their bond issuance to attract investor interest — lowering interest costs.

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

Florida Gov. Ron DeSantis is the latest critic without an argument. Last month, he passed a resolution directing state pensions to prioritize "the highest return on investment for Florida's taxpayers and retirees without considering the ideological agenda of the environmental, social, and corporate governance (ESG) movement." 

Ironically, ESG investments have higher than average returns as customers reward environmentally and socially minded companies. Which means Florida's pension funds may not even change their holdings. If they do, then they will likely earn less and harm their retirees and taxpayers. 

More dangerous are the anti-ESG laws promulgated by Texas and several other states which seek to ban banks that have increased ESG practices in response to market demand. Texan lawmakers have made it illegal for local governments to conduct business with financial companies who have policies limiting exposure to the fossil fuel industry, retaliating against an increasingly common stance inspired by climate conscious investors.

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

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

Oddly, the anti-gun stance of banks does not even fit the definition of ESG, which means to invest in projects or companies with a positive impact on the environment or society. Businesses deciding not to act in a way that could harm their communities is not really ESG, but simply responsible corporate behavior. 

Despite some conservative's claims, it's not true that companies should prioritize profit above all else. Take a look at the pharmaceutical companies like Purdue Pharma paying back billions of dollars to victims of opioid addiction. Just like individual citizens, businesses have an obligation not to actively harm people. 

In a May op-ed, Vice President Mike Pence argued that the GOP should "work to end the use of ESG principles nationwide." He claims, "For the free market to thrive, it must be truly free." But how does urging lawmakers to forcibly stop people from investing in what they want (ESG) make the market free? It doesn't. It's the exact opposite. 

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

Pence and others want to stop the remarkable growth in ESG, but that would mean tampering with free markets — not protecting them. And what is their reason? Do they want to make it harder for people to invest in green projects or buy stock in companies that promote social responsibility? 

What else would right-wing extremists try to outlaw under this inaccurate, irrational argument? Would they attack companies with diverse hiring practices that give opportunity to racial minorities? Would they backlash against businesses that support LGBTQ+ employees? Over 90% of Fortune 500 firms protect LGBTQ+ employees from discrimination.

But Pence and DeSantis don't care about the majority. The argument against ESG has no grounding in free market ideology. They only care about imposing their own political beliefs on others at whatever cost. And that cost would be enormous.

Kevin Bain is the Debt Manager for the City of Detroit and a Partner in Better World Finance LLC. He has a Master in Public Policy from the Harvard Kennedy School of Government.