In recent years, lawmakers across the country have begun debating the pros and cons of using environmental, social and corporate governance (ESG) as a framework for managing financial risk and opportunities. Unfortunately, the conversation provides little context to help us understand what this actually means for businesses, banks or the public.
Hopefully, I can shed some light on the topic, including why you should care that it is currently being discussed at the Utah State Capitol.
While the term ESG was coined in 2005 to describe an organization’s risk management practices, attention to responsible investment is nothing new. The idea dates back to the 19th century with faith-based investing. It grew in prominence, however, in the 1980s when the anti-apartheid movement exposed the role businesses, pension funds and the U.S. Congress played in sustaining South Africa’s apartheid system and demanded that they divest. This divestment strategy played an instrumental role in ending apartheid.
Ecological and economic catastrophes also played a part in raising awareness of the connections between environmental challenges, corporate governance, and sustainable investment practices. The Exxon Valdez oil spill in Alaska in 1989 encouraged investors, business leaders and public interest groups to create the Coalition of Environmentally Responsible Economies. And in 2001, the Enron corruption scandal highlighted the need for sound governance, thus paving the way for ESG.
These disasters showed that investment cannot be measured in terms of profit and loss alone. Instead, it should be understood through the development of long-term value created for all stakeholders, including employees, customers, the planet and the communities they are part of.
And yet, the Utah Legislature is considering legislation that would restrict state agencies and municipalities from engaging in contracts or investing funds with organizations that use ESG as a risk-management strategy, despite evidence that such restrictions could hurt Utah’s economy and taxpayers.
A recent study in Texas, the first state to take legislative action against ESG, shows that these policies cost taxpayers between $300 and $530 million. In Florida, similar policies limited the state’s access to underwriters, forcing them to pay higher interest rates on their financial offerings than California, even though California has a lower credit rating.
Furthermore, anti-ESG legislation is in conflict with building an innovative economic landscape. Our state should encourage organizations to take advantage of the opportunities associated with transitioning to a carbon-neutral economy.
As Congressman John Curtis has said, “there is money to be made on renewable energy.” He’s right. Utah is currently a hub for key industries like battery storage technology, solar and geothermal, among others. All of which are needed to build a thriving and reliable economy.
Our state should support institutions that understand the human, environmental and economic costs of a warming climate and incorporate the risks into their financial analysis, not stifle the transformative thinking needed to improve our air quality or keep our lakes from drying up.
We cannot afford to invest in our own destruction. We need businesses and banks to take action on climate change by reducing their own carbon emissions. We need them to consider value, not just profit and loss. We need them to prioritize responsible, long-term investments that provide benefits to our communities through employment and innovation.
Anti-ESG policies do nothing more than force institutions to make high-risk investments, regardless of whether or not it’s in their financial interest or the interest of the people of Utah.
Melanie Hall
Melanie Hall is the policy director at the Healthy Environment Alliance of Utah.
