States are starting a very expensive culture war

A growing pile of studies and analyses come to the same conclusion: State boycotts of banks and investment advisors are expensive for current and future retirees and taxpayers.

Several states have created blacklists of financial advisors they accuse of considering environmental, social, and governance (ESG) factors when making decisions on oil and gas, firearms, and related industry investments. Several more states have similar sanctions under consideration.

Their aim is to cut those banks and investment firms out of public finance and pension business in their states as punishment for so-called “woke” ESG policies.

It hurts the companies, as intended, by taking them out of consideration for bids on public infrastructure borrowing for roads, schools, and other infrastructure. And those firms are also cut out of advising and managing pension investments for firefighters, police, teachers, nurses, and other public employees.

It hurts taxpayers, too, reducing the competition that keeps prices for public borrowing in check. And current and future retirees lose, too, as advisors who often produce the best returns are denied the right to bid or contract with public pensions in some states.

That’s more than rhetoric: The evidence is piling up from proposed and enacted legislation.

• Arkansas: Proposed legislation would lose an estimated $30 million to $40 million annually for the Arkansas Public Employees Retirement System. The Arkansas Teacher Retirement System estimates it would cost that pension $7 million per year.
• Indiana: An early proposal in Indiana had the potential to cut $6.7 billion from public pension returns there over a decade, according to the Indiana Legislative Services Agency. The version put into law still will cost the state millions of dollars to implement and shockingly did not include any analysis of the potential financial impact to the state’s retiree public employees and pension programs from any forced divestment of current advisers. 
• Kansas: The Kansas Division of the Budget estimated proposed anti-ESG legislation could initially cost state pensions $1.1 billion and increase unfunded liabilities by $2.4 billion more. Pension officials estimate portfolio returns would drop $3.6 billion over ten years.
• Louisiana: Proposed legislation would add $6.27 billion to net public pension liabilities in that state and could also impact credit ratings, according to the Louisiana Legislative Auditor.
• Oklahoma: The state’s anti-ESG law was costing taxpayers $11 million a month in increased borrowing costs until it was put on hold by a state judge, according to an analysis done for the Oklahoma Rural Association by the University of Central Oklahoma. It has already cost taxpayers $185 million, that report said. The Oklahoma Public Employee Retirement System had told lawmakers it would cost $10 million to divest from holding invested with firms already doing business with the state’s pensions.
• Texas: The state’s blacklist cost the state $668.7 million in lost economic activity, more than 3,000 jobs, and $37.1 million in state and local tax revenue, per research done for the Texas Association of Business Chambers of Commerce Foundation.

Sticking to tried and true fiduciary principles is the soundest way to invest on behalf of retirees and taxpayers. Injecting politics into investment decisions raises costs, cuts financial returns, and hurts the citizens elected officials are entrusted to protect. Ultimately, it’s bad for the politicians, too.