When Keeping It Green Goes Wrong

By Matt Patterson, February 8, 2022

As it turns out, capitulating to activist investors in the name of ESG (Environmental, Social, and Governance) investing may be bad for business, especially in Texas. In January, Reuters reported that the “U.S. Securities and Exchange Commission (SEC)’s Texas office has launched a preliminary probe into lenders’ disclosures about their policies on hot-button issues like climate change and gunmakers, according to two people familiar with the matter.”[i] Who could’ve possibly seen this coming? Well, TXEnergyProject did, and you can read that here.[ii]Reuters points out that the SEC inquiry stems from two laws that the Texas Legislature enacted in the 87th Legislative Session, barring state entities from doing business with companies that discriminate against firearms or oil and gas companies.[iii]

The legislature enacted the new laws as a response to the growing number of financial institutions pledging to phase out fossil fuel lending, an industry that is integral to the Texas economy. These institutions are apparently now between a rock and a hard place as they must either prove to the SEC that their ESG investing pledges aren’t just “greenwashing” to attract investors (which would bar them from doing business with the state) or reveal that they are continuing to do business with oil and gas entities and risk financial and legal trouble. As Richard Morrison of National Review opines, it is hard not to chuckle at the huge “green” pretzel that these institutions have unwittingly placed themselves in:

As the old saying goes, it would take a heart of stone not to laugh. Large financial corporations are now being skewered in the Lone Star State as the anti-oil-and-gun virtue signaling they undertook to attract approval from liberals on Wall Street runs afoul of the pro-oil-and-gun commitments they made to gain access to state contracts in Texas. While the conflict might seem comical, the results will likely mean significant legal headaches for big players like Citigroup in the near future and greater skepticism of environmental, social, and governance (ESG) investing going forward.[iv]

This type of virtue signaling also creates a problem for the SEC, which has historically supported ESG investing but is now tasked with ensuring that companies are living up to their pledges. Morrison writes, “Rather than merely cheerlead the adoption of ever more woke corporate policies, they’re now policing — and potentially punishing —those firms that make the most strident ESG claims. That shifts the regulatory dynamic significantly.”[v] This adds significant financial risk for companies that have set outrageous carbon goals or vowed to shun fossil fuel companies, which is a large problem for investors who are seeking to minimize risk. Real Clear Energy explains that, often, “green” pledges by financial institutions end up hurting investors but rarely affecting the energy sector or its prices:

In practice, when trade-offs involving climate materialize, they favor E for environment at the expense of S for social – also for stakeholders, such as customers, suppliers, and employees – and of G for governance, representing shareholders. This tendency is reinforced by large institutional investors, such as the Big Three index-tracker providers and state pension funds, which press companies to adopt net-zero emissions targets. Decarbonization incurs costs, either through replacing lowest-cost energy with costlier sources or, failing that, mandating the purchase of carbon offsets. These costs do not improve shareholder returns; neither do they benefit customers, suppliers, or employees. S and G lose out – as does the economy.[vi]

While refusing to do business with oil and gas companies may be appealing to progressives in Austin, ESG investing ends up hurting its own shareholders, as well as the state. Divesting from fossil fuels is short-sighted and a direct attack on the Texas economy, forcing the Legislature to take action. This strategy completely ignores efforts from oil and gas companies to reduce emissions on their own, and many of the largest reduction goals are set by these very companies. Investors would be wise to stay away from financial institutions who reduce the diversity of their portfolio in the name of climate activism.

[i] https://www.reuters.com/markets/us/exclusive-secs-texas-office-probes-banks-over-disclosures-guns-fossil-fuels-2022-01-05/ [ii] https://www.txenergyproject.org/post/so-called-sustainable-investing-should-not-be-enforced-by-the-federal-government [iii] https://www.reuters.com/markets/us/exclusive-secs-texas-office-probes-banks-over-disclosures-guns-fossil-fuels-2022-01-05/ [iv] https://www.nationalreview.com/2022/01/in-texas-esg-virtue-signaling-is-a-risky-investment/ [v] Ibid. [vi]https://www.realclearenergy.org/articles/2021/10/12/the_e_in_esg_means_cancelling_the_s_and_the_g