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Both sides of the ESG debate are piling pressure onto businesses. Erik McGregor – LightRocket – Getty Images

After years of headlines about the growing environmental, social, and governance (ESG) movement in investing, ESG has been met with understandable skepticism from taxpayers, who both underwrite state and local government pension plans and government borrowing. After all, if the managers of these operations take their focus off properly balancing risk and return–pursuing ideological investment goals instead–taxpayers could be on the hook for hundreds of billions in additional liabilities. Yet, that focus must go in both directions. Forcing those managers to reflexively embrace ESG or to reflexively shun it could deprive taxpayers of the market-based innovation, resilience, and long-term value we’re counting on to avoid a financial meltdown.


According to a Council of State Governments report, at the state level alone taxpayers face $1.3 trillion of unfunded liabilities from government employee pension systems. Administrators of these pension plans need every tool available to them to protect taxpayers against massive bailouts. Passing restrictive laws at the federal or state level, instructing these administrators to avoid certain industries or banks perceived to be too “woke” or not “woke” enough, could put them in a fiscally untenable position.

The financial contagion caused by pro and anti-ESG actors is already spreading into another area of public finance. In several instances, pursuing non‐​financial politically motivated outcomes has led to diminished investment returns, market distortions, and other forms of economic harm.

When Texas passed a law in 2021 that banned municipalities from working with banks that adopted risk mitigation policies related to fossil fuels and firearms, researchers at Wharton Business School found it prompted five of the state’s largest underwriters to exit the market. That decreased local competition for borrowing and increased rates, costing taxpayers an additional $532 million in interest over eight months.

Last year, in Stillwater, Oklahoma, when the City Council sought to borrow money from Bank of America for a major infrastructure project, the state treasurer added Bank of America to a blacklist of firms he said were boycotting fossil fuels. The move forced the city to find a new financier, which The Oklahoman reported ended up providing a higher interest rate. The result was $1.2 million in additional costs to local taxpayers. 

At its core, the free market thrives on competition, efficiency, and adaptability. ESG investing can coexist harmoniously with these principles. Working with investors, companies can choose to voluntarily adopt sustainable practices and prioritize ethical governance, while ensuring the freedom to make investment decisions that allow businesses to enhance their overall performance.

At the same time, companies that invest in resource-efficient practices such as renewable energy can drive innovations that yield financial returns through cost savings, improved operational efficiency, and staying ahead of regulatory changes.

Additionally, companies that engage in robust ESG analysis can be more resilient and better prepared to manage environmental and social risks outside their control, reducing the likelihood of negative events that could impact financial performance. The bottom line: companies should be free to pursue–or not pursue–ESG investing.

The recent onslaught of bipartisan efforts to steer government business away from companies with which they have political disagreements poses a significant risk to taxpayers and their investments. That’s why we recently joined together with a group of fellow center-right taxpayer advocates to outline a set of commonsense investing principles for policymakers. These include:

  • Reject Big Government interventions. Promote limited-government and pro-growth policies that eliminate red tape and reduce tax burdens.
  • Protect pensions and investments from politicization. Do not ban nor mandate certain types of decisions that are outside the realm of maximizing return on investments in the free market.
  • Ensure fiduciaries uphold the duty of care and loyalty at all times and act in the interests of their clients.
  • Remove the shackles of government and allow businesses, pension funds, and individuals to responsibly plan for future uncertainties in a time of rising prices and increased debt.
  • Encourage business-friendly environments with free-flowing and informed capital.
  • Allow businesses to voluntarily adopt sustainable workforce or operational practices without government interference.
  • Keep the government out of boardrooms and reject politically motivated efforts to steer government business away from or towards certain companies based on narrow political agendas.

ESG investing should be neither required nor banned by governments. By embracing commonsense investing principles within the framework of the free market, state and federal legislators will help advance policies capable of meeting the changing needs and expectations of the American people and driving sustainable economic growth.

Carlos Curbelo served as the U.S. representative for Florida’s 26th congressional district from 2015 to 2019. Pete Sepp is president of the National Taxpayers Union.

More must-read commentary published by Fortune:

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.



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