Across the United States, and in Texas specifically, there has been a push by conservative policymakers to restrict the use of Environmental Social and Governance (ESG) policies when making money management decisions. Nationally, trillions of dollars in investments, including state pension funds and individuals’ retirement savings, are at stake, as is the future of the fossil fuel industry. With ESG-proponents asserting that the impacts of global warming are becoming more severe and apparent, consumers and shareholders are pushing investment firms to consider climate-related risks when making financial decisions. Texas legislators, however, are pushing back on this idea, assailing ESG funds legislatively and expanding their anti-ESG efforts this session relative to state pensions and insurers.
Building on success during the 2021 legislative session to curtail the encroachment of ESG policies in Texas, state legislators have filed several bills in the 2023 session aimed at expanding the anti-ESG push by further limiting state pension investments and seeking to regulate the insurance industry’s consideration of ESG metrics.
Last session, the Texas Legislature enacted legislation to bar certain state government entities from doing business with financial institutions that, according to the state, do not support oil, gas, and guns. Senate Bill (SB) 13 and SB 19, which both took effect on September 1, 2021, aim to prevent financial managers from considering ESG policies when making investment decisions. Specifically, SB 13 requires the Texas Comptroller to develop and maintain a “blacklist” of financial entities that boycott fossil fuel companies. In August 2022, Comptroller Glen Hager released a list of companies and investment funds barred from doing business with the state.
SB 19 requires companies with 10 or more employees that enter into contracts of $100,000 or more with state entities to attest that they do not and will not engage in boycotts against fossil fuel or discriminate against firearms companies during the duration of the contract.
This session, Senator Bryan Hughes (R-Mineola), has filed legislation to broaden the fight against ESG policies in Texas. SB 1446 would impose additional limits on the types of investments that state pension managers can make and would also restrict shareholder proposals that could dictate insurance companies’ business with oil and gas firms. Moreover, the legislation applies to proxy advisers who make recommendations on shareholder votes for state employee pensions. If SB 1446 becomes law, then pensions that manage billions of dollars for state employees could only work with external asset managers if those companies agree to make investment decisions based solely on financial factors. Under the bill, public retirement funds would have to submit detailed reports to the State Pension Review Board each year outlining their business relationships with asset managers and consulting firms that provide investment services.
Separately, Senator Hughes is seeking to expand the anti-ESG push to the insurance industry by targeting shareholder proposals that limit business with fossil-fuel producers. This bill would prohibit insurers from including a political shareholder proxy statement or implementing a shareholder proxy proposal. A “political shareholder proposal” is defined as a proposal that directly or indirectly seeks to limit an insurer’s ability to insure risk related to fossil fuel-based energy; requires or asks insurers to reduce or track greenhouse gas emissions; or prohibit or limits an insurer’s ability to insure an entity involved in legal activity “for the purpose of achieving environmental, social or political goals.”
If enacted, the ban on insurers considering ESG scores when establishing insurance rates, could kick some of the country’s best-known insurance brands out of the Texas insurance market. A number of large insurers, such as the Hartford, Allstate, and State Farm, currently utilize ESG metrics. Insurance companies fear that state restrictions on ESG considerations may interfere with their ability to make sound decisions about the policies they offer to their customers because environmental, social, and governance issues can pose real financial risks.
Financial companies claim that ESG investing is a framework used by money managers as they consider the merits of investments based on criteria beyond profit. For Instance, the decision to purchase shares in an oil producing company may come into play if the portfolio manager thinks there may be a significant risk posed by climate-related restrictions that could hamper the business in the future years.
Proponents of anti-ESG measures claim that financial institutions who take ESG policies into consideration when making financial decisions are not acting in the best interest of shareholders. According to a statement by Comptroller Glen Hager, “The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy.” Similarly, Senator Hughes told Fox Business News that the job of investment firms “is to maximize shareholder wealth, and we know from their own admissions that they’re playing politics with other people’s money.”
However, there have been recent studies, such as this one, that indicate that anti-ESG policies could actual distort financial market outcomes and drive up costs to consumers. As a result of the anti-ESG legislation passed in 2021, five of the largest municipal bond underwriters in Texas exited the market. Issuers who previously relied on these underwriters now face more uncertainty and higher borrowing costs because there are less underwriters in Texas. The study predicts that Texas insurers will incur $300-$500 million in additional interest on the $31.8 billion they borrowed in the first eight months after the effective date of the new law.
While the full impact of Texas’s anti-ESG push remains to be seen, Texas business leaders and the insurance industry are certainly watching this session closely. The anti-ESG legislation targeting insurers would have a broader reach than the laws in effect for financial institutions because they would go further to limit an insurer’s ability to do business with individuals and corporations, not just the state. This could set an interesting precedent for other industries who may find themselves in legislative crosshairs.