Kansas’s months of discussing legislation regarding ESG, or environmental, social, and governance, criteria towards state governmental investing is on its way to Gov. Laura Kelly’s desk in the form of HB 2100. While the vote was a veto-proof majority in the Senate, it wasn’t in the House. Governor Kelly hasn’t given any indication of whether she will veto the bill or not.
The bill itself prohibits KPERS, state agencies, and other state-level government subdivisions from investing in companies based on ESG criteria – be it good or bad. Examples of ESG criteria listed in the bill include preferential or discriminatory treatment towards energy providers, resource producers such as the agriculture and lumber industry, greenhouse gas emissions and disclosure, and whether the company assists or chooses not to assist employees in abortions or gender reassignment surgeries.
Specifically, KPERS is required to act “solely in the interest of participants and beneficiaries of the system.” That is, look strictly at what investments yield the greatest financial returns and invest in those.
An earlier version of the bill would have prevented even private equity funds from using ESG criteria but this was dropped – and for the better. It’s one thing for the state to manage its financial investments with taxpayer dollars, but it’s a completely different question when the government starts to dictate how private citizens and companies should behave with their own money.
ESG supporters like BlackRock’s CEO Larry Fink and Bank of America CEO Brian Moynihan vary from those who see it as a tool to direct companies towards policy goals, or investors who are trying to use it to quantify future financial risk from engaging in certain environmental or social practices. But the fundamental issue is the lack of transparency in how ESG criteria are made and imposed on companies.
For instance, Phillip Morris – the manufacturer of Marlboro cigarettes – is part of the Dow Jones Sustainability Index with other companies positively ranked for ESG…despite the fact that the tobacco goods they produce are the subject of “Merchant of Death” satire on the big screen that ESG proponents revel in. Similarly, Exxon and BP – two oil companies that activists argue are some of the most responsible for global warming and thus should receive a low rating – are both ranked BBB. This is because companies can “make carbon neutral pledges” or “administer a survey of staff on company health” and get flying colors as if they’re leading the world in ESG.
Similar issues in ESG transparency are playing out at the national level too. In 2022, the SEC proposed a climate rule that would require companies to disclose emissions across their entire supply chain, business partners, and other peripheral entities. This could include mom-and-pop type businesses that provide services to larger corporations. Again, if a private company wants to use ESG, they should largely be free to do so. But, a cleaning company shouldn’t face death by bureaucracy because they happen to clean a small Exxon office location. Not only is this rule borderline unlimited in scope, but it was created with the consultation of South Pole, a climate consulting firm exposed for selling 27 million tons of fake carbon credits in Zimbabwe in 2022. After the firm had miscalculated the carbon content of its forestry assets, it continued to sell the fraudulent credits anyways. And yet, this firm was cited six times in the SEC climate rule, met with the SEC behind closed doors, and contributed to the cost of compliance estimations.
ESG’s current instances of blatant hypocrisy expose it as a framework crafted by and for investors, consultants, and other opaque entities to alter investment. ESG is still a relatively new topic, and perhaps someday there will be a more transparent and open approach to how public and private entities can quantify risk. Still, the “black box” that is the creation of its criteria is worthy of public scrutiny and skepticism. HB 2100 takes a step in the right direction by focusing taxpayer investment on taxpayer return. But, legislators should continue to refrain from telling the private sector how to invest.