Opinion | Texas’s war against ESG investing is ingenious but futile

Felix Mormann is a professor at Texas A&M University School of Law.

Texas Comptroller Glenn Hegar on Aug. 24 issued a list of 10 financial firms and nearly 350 investment funds and directed the state’s pension funds to divest from any companies on the list. The order will reshape the pension funds’ portfolios, because the firms singled out include financial heavyweights such as BlackRock, BNP Paribas and UBS.

Hegar was acting in eager execution of a bill passed last year prohibiting state investment with financial firms that “boycott energy companies.” The comptroller’s move was just the latest pushback by oil-producing states against the corporate embrace of ESG — the shorthand for taking environmental, social and governance aspects into account when assessing the value of companies.

The efforts on this front by Hegar and the Texas legislature are noteworthy both for their ingenuity and their futility.

The comptroller’s blacklisting is ingenious insofar as it turns one of climate activists’ favorite weapons in the war on carbon — divestment — against them. For the past decade, the divestment movement led by Bill McKibben and his 350.org platform has urged investors to drop some, if not all, of their fossil-fuel holdings — to stigmatize the hydrocarbons industry and limit its access to capital.

Dozens of major institutional investors, including pension funds, university endowments and financial institutions, managing more than $40 trillion in assets, have answered the call for divestment from fossil fuels. Hegar’s blacklist attempts to give these entities a taste of their own divestment medicine.

Yet it is far from clear what exactly constitutes an energy “boycott” by these now-targeted firms. Consider BlackRock — the Wall Street giant’s leadership may advocate vocally for wind, solar and other low-carbon renewables, to the possible detriment of oil and gas companies in Texas. But BlackRock, responding to the comptroller’s announcement, noted that it “does not boycott fossil fuels — investing over $100 billion in Texas energy companies” on behalf of its clients.

Apparently, that is not enough to earn Hegar’s approval. But his blessing may not matter as much as he or Texas legislators would like to think. That is because they have a problem of scale. In this case, the adage that “everything is bigger in Texas” does not hold true. It’s many of the firms on Hegar’s list that are the behemoths.

BlackRock alone manages a portfolio of about $8.5 trillion — that’s trillion with a “t.” UBS has $3.1 trillion in assets under management. The assets managed by the Texas pension funds tasked with divestment from blacklisted entities, meanwhile, are measured in hundreds of billions of dollars — that’s billions with a “b.” It matters that two orders of magnitude, or two zeros, separate Texas pension funds from the blacklisted global financial giants: When the state withdraws its pension fund assets, it will hardly move the needle in the global financial marketplace.

Moreover, Hegar and the Texas legislature are effectively asking pension fund managers to breach one of the fundamental rules of U.S. trust law. Pension funds such as the Teachers Retirement System of Texas and others subject to the divestment mandate are set up as trusts because their leadership manages the pension fund’s assets for its members — the state employees paying into the fund.

For such entities, the sole-interest, or fiduciary, rule requires trustees to maximize the fund’s bottom line. This means they cannot prioritize other, non-monetary investment criteria, such as a social or political agenda, over profit maximization.

Does the sole-interest rule preclude investment in Texas energy companies? Not at all, if the latter offer solid returns. But neither does trust law’s profit-maximization requirement preclude investment in wind farms, electric vehicles, smart thermostats and other low-carbon ventures vying to end our addiction to fossil fuels. That hasn’t prevented conservative critics of ESG as “woke capitalism” from increasingly citing the fiduciary rule in their attacks.

From the solely relevant profit perspective, these sustainability-oriented technologies and funds deliver attractive returns to their investors, often outperforming the very fossil-fuel assets that Texas seeks to protect. Hegar nonetheless is ordering Texas pension funds to divest from a large number of financial firms and funds pursuing these profitable investments — possibly at the expense of the state’s employees of today and retirees of tomorrow.

The Texas divestment mandate is unlikely to usher in the Lone Star State’s next oil-and-gas boom, given that pension fund managers may well look beyond their own state’s oil and gas companies as they comply with U.S. trust law by seeking the most lucrative investment opportunities for their members.

If anyone, it is these members — teachers, firefighters, municipal workers and others — and their retirement savings that will bear the financial burden of the comptroller’s blacklist. It is a list that reveals him and the Texas legislature as modern-day Don Quixotes, literally and figuratively fighting windmills.

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