ESG bill could cost millions
Analysts fear disastrous consquences for taxpayers
TALLAHASSEE — Blacklisting investment managers and banks that make business decisions based on what Gov. Ron DeSantis calls “socialist” woke policies could come with disastrous consequences, including hidden costs and a chilling effect on free speech, economic analysts say.
Legislation introduced for the upcoming session that begins Tuesday would embrace the governor’s goal to prohibit state agencies and local governments from investing tax dollars into funds that follow environmental, social and governance principles known as ESG.
It would also bar government agencies from depositing money with banks that have ESG policies, and prohibit banks from denying services based on a client’s religious, social and political leanings or if they are in the firearms or fossil fuel industries. But it carves out an exception for institutions that can claim a religious purpose.
“They know not what they do,” said Matthew Winkler, editor-in-chief emeritus of Bloomberg News, said of DeSantis and the GOP-dominated Legislature backing his agenda. “Any policy that is arbitrary and capricious has hidden costs for the state and its taxpayers.”
One analyst, Econsult Solutions Inc., calculated that if Florida were to enact anti-ESG banking restrictions similar to what Texas approved in 2021, it would cost taxpayers as much as $361 million in higher interest rates for municipal bonds because of the limited options the state would have in choosing bond brokers.
Financial analysts also said it could affect millions of retired state employees invested in the state’s $180 billion retirement fund because ESG issues do impact investment returns.
“For any state, but particularly Florida, to not consider these risks and interfere with the free market is questionable,” said Steve Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, a nonprofit, nonpartisan organization that helped pay for the study.
A $35 trillion industry
ESG policies have been widely embraced by the largest trust funds and banks on Wall Street.
“Companies committed to ESG favor protection of natural resources, human rights, health and safety, community engagement, transparency, compliance with regulatory policies, diversity, equity and inclusion,” Winkler said. “Investors like the potential.”
ESG-based investments have grown into a $35 trillion industry, Winkler said, citing the Global Sustainable Investment Alliance. One ESG index grew 3,400 times since it began in 2016, Winkler said.
DeSantis views the trend differently. Banks and financial institutions that practice “woke banking,” and “inject political ideology into investment decisions, corporate governance, and really just the everyday economy” are putting politics above sound fiscal policy, he said during a recent news conference in Naples.
States such as Florida, Texas and other Republican-controlled states have passed or are considering legislation to stop doing business with companies that embrace ESG when analyzing the risks of investing in stocks, bonds and mutual funds.
DeSantis launched his attack on ESG in August, with the State Board of Administration, consisting of DeSantis, Attorney General Ashley Moody and CFO Jimmy Patronis, passing a resolution to prohibit future investments with firms that embrace it.
Patronis subsequently announced in December that he was freezing $2 billion of the state’s treasury investment pool managed by BlackRock, the world’s largest money manager in the United States with $10 trillion in assets.
Patronis called out BlackRock CEO Larry Fink for embracing ESG, who told his shareholders that Wall Street’s adoption of ESG is “capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers and communities your company relies on to prosper.”
House Speaker Paul Renner, R-Palm Coast, announced the legislation that aims to limit ESG in Florida. The intent is to make investment decisions solely on financial factors, and not “not political virtue signaling through radical ESG investment strategies,” Renner said.
“Those with the responsibility of investing state dollars, like state employee pension fund managers, have a primary fiduciary duty to act in the sole financial interest of their client and should not capitulate to the ESG demands of martini millionaires,” Renner said.
JP Morgan Asset Management, which manages 3.2 million shares valued at $456 million for Florida’s pension fund, according to state financial records, says on its website that assessing “financially material” ESG considerations strengthens risk management and contributes to long-term financial returns.
“We believe that when companies and other security issuers manage these factors they are likely to be more efficient, more aligned with consumer preferences and less exposed to regulatory risk,” JP Morgan said on its website.
Apple, Florida’s largest holding at 16.67 million shares valued at $2.5 billion, according to state financial records, also is committed to ESG.
“We believe that business, at its best, serves the public good, empowers people around the world, and binds us together as never before,” Apple CEO Tim Cook said.
The new legislation says enforcement would fall under the state’s Deceptive and Unfair Trade Practices law.
The bill also would require certification by institutions doing business with the state, promising not to follow political or ideological factors or risk being charged with perjury, termination of their contracts, or civil administrative action by the Attorney General.
It also would prohibit state and local governments, and public schools, universities and colleges from giving a preference to a company based on social, political or ideological beliefs or spending money on projects that promote ESG goals.
There is also a prohibition against state agencies and local governments issuing bonds labeled as ESG for “environmental, social or sustainable projects.”
First Amendment issues
The bill lays out rules for communications with vendors, prohibiting emails or text messages discussing ESG goals or values. It would require contracts to have a disclaimer against discussing social, political or ideological interests.
These restrictions raise a huge free speech red flag, said Lata Nott, a First Amendment fellow with the nonprofit watchdog group, the Freedom Forum.
“An expression of values is an act of political speech, so it would be protected by the First Amendment,” Nott said. “The courts would find it violates the First Amendment.”
Forcing state investment managers to boycott most major banks and investment firms that have historically bid on municipal bond issuances also reduces competition and raises interest rates, Rothstein said.