Frontiers of Freedom

The last few years, state legislatures have zeroed in on environmental, social and governance (ESG) investment criteria. Proponents and critics of the state laws have argued over the effects on public pensions’ returns, and the cost to taxpayers, citing differing studies across the board. In the courts, the legislative solutions have fared poorly recently. In Missouri, a federal judge blocked the state’s anti-ESG rules, finding the rules are preempted by federal law, and violated the First Amendment. In Oklahoma, a District Court judge permanently blocked the state’s Energy Discrimination Elimination Act this summer, though the ruling is being appealed. Texas, one of the first states to adopt a law addressing ESG concerns, is experiencing its own legal battle of its anti-ESG rules. 

Now, just over three years after Senate Bill 13 went into effect, the Texas legislature is now reviewing the implementation of the law, per Lieutenant Governor Dan Patrick’s interim legislative charges. The Senate Committee on State Affairs recently held a hearing to review the interim legislative charges put forth to them by the Lt. Governor in April. While the committee heard testimony on two separate topics, much of the hearing focused on the ESG investing, the perpetrators ‘responsible’ for its proliferation, and Senate Bill 13, a 2021 law that blacklisted financial institutions and individual funds that were deemed to boycott the oil and gas industry. 

Lt. Governor Patrick deserves significant praise for his well thought out interim charges. The committee took the opportunity to review its implantation, how state systems are faring, and the parallel proxy advisory system that pushes much of the ESG agenda into shareholder votes. Importantly, the Lt. Governor included the opportunity to determine how a company “may be removed” from the state list – a critical aspect of the law itself. Unfortunately, it appears that topic may have been a missed opportunity for the committee, which focused less time on how companies can illustrate their change and be removed, and instead focused on companies’ actions that landed them on the blacklist years ago in the first place. To date, no firm has been removed from the list, but additional companies have been added. 

While there is disagreement in Texas, and in other states with similar laws, on the effects of the legislation on pension systems, municipal bonds and the cost to taxpayers, it is important to remember that the spirit of the laws are to ensure a state’s returns are maximized, and industries protected. Texas has so far led the way on keeping ESG and woke policies out of the state’s investment decisions. It is only natural for state legislators to take their cue from the Lt. Governor and review whether their hard work has done enough for financial companies to be removed from the list. Engaging with the firms currently blacklisted would ensure that Texas has the highest possible number of financial advisors to choose from – ensuring that prices, and costs to consumers are as low as possible, facilitating the best returns.

The hearing also examined proxy advisors’ role in the state’s public pensions systems and how the proxy advisory duopoly, Glass Lewis and Institutional Shareholder Services (ISS), use ESG in their recommendations. Interestingly, asset managers’ support for environmental and social shareholder proposals has plummeted over the last three years but Glass Lewis and ISS continue to overwhelmingly support these ideological proposals. Lawmakers on Capitol Hill have recently turned their attention to these foreign-owned firms, and Texas should also critically analyze how Glass Lewis and ISS influence shareholder votes, potentially harming the state’s oil and gas industries further.

Texas has it right in ensuring vital state industry like oil and gas are not being boycotted by these state fund managers, but we should examine this law through a critical lens to make sure it isn’t at the detriment of taxpayers either.  Protecting Texas’ critical industries is important, but minimizing the harm to taxpayers and the local economy is too. If a firm illustrates it no longer meets Texas’ definition of boycotting the oil and gas industry, it should be allowed to conduct business with public entities in the state. A more robust process for removal from the list may be needed, and a dual, but separate, examination of the proxy advisory system should follow suit.

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