Treasurers explore political line between ESG policy and data

As states tinker with laws that restrict pension investments in funds that favor environment, social, and governance factors, the debate over strategy and long-term fiscal responsibility continues between red and blue state treasurers who oversee investment policies. 

"I tell people I don't care so much how you're doing this quarter. I care about how you're doing over the next quarter century," said Illinois state treasurer Michael Frerichs, a Democrat. "ESG is a strategy to help us determine if a company is sustainable for the long term." 

The comments came during a panel discussion Wednesday at the Brookings Municipal Finance Conference in Washington, D.C. 

Illinois State Treasurers Office

On the other side of the debate, Kansas state treasurer Steven Johnson, a Republican, said ESG-related investment strategies may invite financial risk instead of mitigating it.

"There are things mentioned in ESG that are financial risks," said Johnson. "Those are financial risks that I want to consider, whether there was ESG, and where it goes beyond that. Exactly where the line of judgment begins and data ends is not entirely clear." 

The partisan divide over ESG-related investment strategies among states and in Congress continues to drive debate and legislation. Kansas passed what's considered to be anti-ESG legislation without the governor's signature in April of 2023 while Illinois passed its Sustainable Investing Act in 2020.  

Both treasurers agree that boiling ESG down to pure data points is a sound financial strategy, but it can still lead to behavior that can be skewed by political leanings.  

"We still invest in the fossil fuel industry," said Frerichs, "but we have concerns about their ongoing viability," he said. "If your plan is just to drill more and to drill indefinitely and assume the prices are going to be high forever, that's probably not a great long-term business model."  

Kansas has one foot in the fossil fuel industry and another in renewables. The state produces and refines petroleum and ethanol, but in 2023 wind energy accounted for 46% of Kansas's generated electricity. 

"We have an important wind industry," said Johnson. "Where wind is my best return and risk, we would seek those investments," he said. He would favor fossil fuels "where oil over the long-term, 50 years, is my best return and risk," he said. "Where do I get the highest return? That is what I want to seek." 

Kansas dialed back its original anti-ESG legislation for government investments and contracts, but the legislation still resulted in some undefined costs, he said.

"One of them was proposed to have a very high fiscal note. It may have been $3 billion had it passed. The bill that ultimately passed was given well over a million-dollar fiscal note from our pension organization. One call to an alternative provider suggested it's less than $60,000. The actual cost was $50,000." 

Earlier this week, the Ohio legislature began deliberating a bill that would bar the state's pension systems, colleges and universities and the Bureau of Workers' Compensation from prioritizing ESG factors when making investment decisions. The bill has passed in the Senate but is stuck in the House. 

In Missouri, the Securities Industry and Financial Markets Association is duking it out in court with the state over new anti-ESG securities rules. The measures require advisors and broker-dealers to obtain written consent from customers to buy or sell an investment product based on social or other non-financial objectives.  

As the debates continue in the courts and the statehouses, the will of the market may eventually win out. 

"You see it rejected time and time again when legislation is put forward at state legislatures," said Frerichs. "You've seen Chambers of Commerce come out opposed to this because sometimes they cross the line of not being free markets by limiting choice and options."