Various states have implemented laws safeguarding their economies and retirees by mandating that public funds are invested by financial institutions prioritizing financial performance over environmental, social, and governance (ESG) objectives.

Advocates of ESG oppose such legislation, preferring to direct investments toward favored causes and away from disfavored ones like fossil fuel and firearms manufacturers.

When faced with demands that retirees’ funds be managed to maximize returns rather than for political reasons, ESG advocates commonly reference two studies purportedly demonstrating increased costs from legislation prohibiting ESG-based investments.

Fortunately, recent analyses have discredited both studies by revealing that they fallaciously conflated correlation with causation, neglecting the fact that states lacking such laws also experienced cost hikes due to broader market influences.

Concurrent with the Wharton School of Business launching an “ESG Initiative,” a Wharton academic released a study related to Texas laws forbidding public contracts with financial firms that committed to penalizing energy and firearms companies. The study alleged that several banks left the Texas municipal bond market due to this law, leading municipalities to incur substantial additional borrowing costs.

However, the Wharton study’s assessment spanned only an eight-month period, and the authors later acknowledged that banks partially re-entered Texas after that time. This reentry suggested that the laws may have motivated banks to change their ESG practices and that the alleged adverse impacts vanished post-reentry.

Nevertheless, numerous reports have championed the original findings from the Wharton study, with a subsequent paper by a consulting group leveraging it to project costs for other states considering similar legislation. This paper was commissioned by ESG activist groups called As You Sow and Ceres.

Thankfully, a recent analysis from four academics at respected universities contradicted the Wharton study by asserting that Texas municipal borrowing costs did not actually rise due to the law. Although costs increased following the law’s implementation for eight months, the new study highlighted that other low-tax states with similar bonds experienced analogous cost spikes.

This indicates that the temporary departure of some underwriters from Texas was insignificant, underscoring the competitiveness of the underwriting sector. In essence, the Wharton study identified correlation but failed to establish causation.

A similar situation unfolded in Oklahoma, which long mandated fiduciaries of public pension systems act “solely in the interest” of the system. In 2022, Oklahoma passed legislation necessitating public entities to shift away from investing in institutions with aims to penalize energy companies for their production.

Given that Oklahoma heavily relies on taxes from oil and gas production, with revenues reducing significantly recently, the state links this decline to its fiscal health and citizens’ jobs to ESG advocates like BlackRock. The latter spearheaded a Glasgow Financial Alliance for Net Zero commission that advocated for the “early retirement of high-emitting assets” such as coal mines, oil fields, and gas pipelines.

Instead of demonstrating that ESG policies lead to improved returns, ESG proponents resorted to an anonymously-funded study by Professor Travis Roach. This study claimed that laws opposing ESG led to higher municipal bond costs.

However, recent analyses showed that the Roach study exhibited a pattern of data cherry-picking and disregarded that national and state municipal bond data revealed essentially identical interest rate spikes in Oklahoma’s bonds compared to elsewhere. Once again, a study purporting to show cost hikes failed to differentiate correlation from causation and neglected to consider other market factors.

ESG activists employ these misleading academic maneuvers because they struggle to justify their objections to these laws on merit.

The laws in Texas and Oklahoma aimed at safeguarding retirees’ assets from ESG ideologies are part of a broader trend in over a dozen states to reorienting state pension investments toward financial returns. Many regions have instated laws clarifying that public pension funds must be managed solely in the financial interest of participants and beneficiaries.

These laws serve to expound on existing pension system legislation at federal and state levels, which have always demanded an exclusive focus on financial benefits.

These clarifications should not be contentious. Investment managers should prioritize maximizing returns for their clients, particularly when those returns underpin state pension systems. if investment managers cannot or will not prioritize financial returns, they should not engage with public pension funds.

To mitigate such conflicts of interest, financially-focused public entities can transition to other institutions with minimal or no switching costs. For instance, after Oklahoma’s pension system examined possible costs of moving funds from BlackRock and State Street – firms inclined to penalize energy companies in line with net-zero emissions goals – it concluded that five of the nine funds analyzed “had zero or near-zero switching costs and bidders offering comparable or better fees and performance to BlackRock and State Street.”

The long-term efficacy of these decisions is apparent, with non-ESG funds showcasing superior returns compared to ESG ones, implying that asset managers advocating for ESG targets will compromise returns. Additionally, ESG initiatives to phase out coal and gas power plants, oil fields, and livestock holdings are detrimental to these states as well as the U.S.

With the exposure of ESG’s academic scare tactics, what remains is a predictable reality. Legal mandates compelling financial managers to prioritize financial returns are beneficial for investors, energy security, and the economy.

Paul Fitzpatrick is the president of the 1792 Exchange, an organization dedicated to promoting liberty by shielding small businesses and nonprofit entities and steering corporations back to neutrality.