Economic Impacts
Legislative efforts to disrupt financial institutions and companies that make responsible investment and business decisions have been scuttled amid revelations about the millions of dollars in additional taxpayer costs these policies would result in, as well as the growing wariness over interfering with businessesâ freedom to invest responsibly. These restrictive investment policies expose retirement beneficiaries to unnecessary risk, cost taxpayers hundreds of millions of dollars through higher interest rates on state and municipal debt offerings, and place unreasonable burdens on financial institutions. The economic impacts include:Â
Forced divestment and decreased returns for pensioners
Certain bills would force states to divest their assets either from institutions deemed to have strong ESG standards in their investment strategies or institutions deemed to be âfossil fuel boycottersâ. Without exploring the reality âboycottersâ, this type of legislation has been found to result in decreased investment returns for public pensions funds. To compensate for the shortcoming, it would require a significant increase in employer contributions and state fund appropriations over time.
The Kansas State Division of the Budget projected reduced returns of $3.6 billion over 10 years for the Kansas Public Retirement System (KPERS) if currently proposed investment restrictions were adopted.Â
A Senate bill in Louisiana would require that fiduciaries of public retirement systems make investment decisions based solely on financial factors, excluding ESG considerations. The Louisiana Legislative Auditor states that â[SB5] ... makes several changes that could lower expected investment returns and increase administrative expenses for Louisiana public retirement systems.â The Louisiana Legislative Auditor has estimated the net actuarial and fiscal impact of SB5, in which, it projected that SB5 would increase Accrued Actuarial Liability by $6.271 billion. Â
A House bill in South Carolina would prevent the state pension funds from considering ESG factors. The fiscal impact analysis by the South Carolina Revenue and Fiscal Affairs Office estimates that the fundsâ expenditure will increase by $1 billion with an additional 5.0 FTEs to manage the proxy voting in-house and up to $292,000 to hire an external proxy advisor.Â
The Arkansas Public Employees Retirement System (APERS) estimated that they could lose $30 million to $40 million a year due to an anti-ESG bill that would require the state treasurer and public entities to divest assets from certain institutions that use ESG-related metrics. Likewise, officials from the Arkansas Teacher Retirement System estimated that the system could lose $7 million a year as a result of the legislation, which they described as a conservative estimate.Â
The Indiana Public Retirement System (INPRS) found that â[the anti-ESG legislation] could result in reduced aggregated investment returns for defined benefit and defined contribution funds managed by INPRS by $6.7 B over the next 10 years. Such a decrease would reduce the estimated annual return on investment for defined benefit pensions managed by INPRS from 6.25% to 5.05%.âÂ
The Oklahoma Public Employees Retirement System could face $9.7 million in taxes, fees and commission costs if it is forced to divest from BlackRock, Wells Fargo and Co., JPMorgan Chase and Co., State Street Corp. and Bank of America, according to the OPERS Chief Investment Officer Brad Tillberge.Â
Higher interest rates on state and municipal debt offerings
Various states have proposed or enacted laws that blacklist Wall Streetâs largest municipal bond underwriters, barring banks and other institutions with certain ESG policies from acting as underwriters for bonds issued by state governmental entities. This will lead to higher municipal bond interest rates that will cost taxpayers.Â
Analysis by the economic consultant firm ESI and released by Ceres and other organizations found that taxpayers in six states â Kentucky, Florida, Louisiana, Oklahoma, West Virginia, and Missouri â could have been on the hook for up to $700 million in excess interest payments if such restrictions on sustainable investing had been passed and implemented.Â
If Florida enacted legislation restricting considerations of climate and other sustainability risks and opportunities, similar to that of Texas, and restricted the same investment banks as Texas did, total increase in interest costs for bonds issued in Florida in the last 12 months would range from $97 million to $361 million.Â
In Missouri, the study estimates a restrictive Senate bill will result in a total increase in interest costs for bonds issued in Missouri and would range from $32 million to $68 million.Â
If West Virginia enacted a Senate bill targeted at firms they say are energy boycotters it would only impact state issuance and not apply to municipalities, counties, or non-state issuers, unlike the Texas laws. If this bill had similar implications as the Texas legislation, but it only impacted the narrower subset of communities targeted by the bill, the total increase in interest costs for bonds issued in West Virginia in the last 12 months would range from $9 million to $29 million.Â
More findings: Â
A previous study by the Wharton School of Business found that significant financial impactsâpotentially upwards of $532 million in additional interest paymentsâof recent legislation to Texas taxpayers.Â
A study from the Texas Association of Business revealed the transaction costs associated with issuing debt from Texas' anti-ESG laws are costing the state nearly $700 million in lost economic activity and local and state tax revenue and more than 3000 jobs.
A study found municipalities in Oklahoma are facing additional borrow costs due to the passage and implementation of anti-ESG legislation, raising borrowing costs for municipalities in Oklahoma by 59 basis points on average, a 15.7% increase. Due to the increase, the study estimates $184 million of additional expenses have already been locked in as a result of the legislation.
Increased borrowing costs due to financial industry restrictions
Likewise, proposed âfair accessâ legislation which has been introduced in several states across the country would raise costs for borrowers including many public entities. These bills propose to ban financial institutions from doing business in a state if they are found to discriminate due to their political affiliation or âsocial credit scoreâ. These terms are either vague or largely undefined, providing significant discretion to the State Treasurer or Attorney General as with the âfossil fuel boycottâ legislation enacted in Texas.Â
Analysis by Bloomberg further demonstrates the damage to state bond prices regardless of credit scores because of anti-ESG legislation.Â
General asset management costs
Some policies considered in many states prohibit the management of state funds by financial institutions that are deemed ineligible because of their ESG policies. Consequently, some states will either need to turn to alternative institutions that charge higher fees or hire more full-time employees and rely on internal investment management.Â
In late 2022, Missouri State Treasurer Scott Fitzpatrick announced that the Missouri State Employeesâ Retirement System (MOSERS) had sold all public equities, or about $500 million in pension funds, managed by BlackRock. The funds are now managed primarily by NISA Investment Advisors LLC. According to the MOSERS annual report, NISAâs expense ratio is more than three times that of BlackRock, at 0.589% versus BlackRockâs 0.184%. This will result in a total cost increase of over $1.7 million per year for MOSERS. If all funds were managed by BlackRock instead of NISA, costs would be reduced annually by about $6.4 million.Â
Compliance and proxy voting reporting costs
Proposed legislation in several states establishes new requirements on proxy voting for fiduciaries as well as their proxy advisors and other service providers. The model legislation calls for significant increases in reporting and tracking requirements on proxy voting for public pensions causing administrative costs to substantially increase. States will also see increased expenditures for hiring staff to monitor numerous financial institutions in order to meet the legislationâs requirement of maintaining a list of ineligible institutions.Â
Legislation introduced in Indiana requires a governmental entity to, at least annually, âtabulate and report all proxy votes made in relation to the administration of a fund of the public pension system.â This would include more than 200,000 votes annually. According to a fiscal impact statement by Indiana Legislative Services, the Indiana Public Retirement System (INPRS) estimates that âthe changes in the bill regarding proxy voting would increase administrative costs by $550,000 per year (p. 3)âÂ
On the positive side, some states including Illinois and Oregon have passed policies to explicitly protect the right to consider sustainability and other material financial factors. Two bills were also introduced in the California Senate that would give investors, consumers, and other stakeholders far more insight into companiesâ efforts to address the financial risks of the climate crisis.