Texas’ answer to “Woke” Investing looks kind of smart


One of the most surprising aspects of Texas’ anti-ESG law, just passed for companies like BlackRock Inc., is that it turns out to offer a big lesson for environmental, social and governance investing’s cousin, socially responsible investing, or SRI. Not on purpose, of course.

ESG investing is often confused with SRI. The two come together as financial piety or under that term now so overused and abused, your father probably says: “woke.” They are not the same thing. SRI is values-based and most often exclusionary: “I don’t want to fund X undesirable sector, so I won’t give my money away.” ESG is risk-based and more nuanced: “I anticipate risks related to ESG issues that could harm or enhance the value of a security, consider measures to address them, and then under or overweight in accordance with circumstances.” SRI is about maximizing virtue; ESG is about wealth maximization.

Can ESG labels be used to disguise other purposes? Of course; As with any other investment topic, there is ample potential for hucksterism or plain carelessness. Even Larry Fink, the chief executive of BlackRock, has been known to mix ESG with SRI.

And now so is Texas, in an interesting twist on the theme. Under Senate Bill 13, which took effect almost a year ago, the state comptroller created a list of financial firms deemed hostile to fossil fuel producers that would now face barriers, or outright exclusion, from doing business with state and local entities. , such as raising municipal bonds. In theory, the law punishes Wall Street firms with ESG policies, which could, for example, dissuade them from lending to an oil producer.

In practice, this is true to an extent: big financial firms would prefer not to lose any business in the country’s second largest economy. But even in practice, the law is riddled with loopholes that can dilute the impact; One allows state pension funds not to divest any holdings involving banned firms if doing so would harm their performance. This is kind of big and it takes an interesting turn. Because what Texas is doing here is similar to SRI.

There is a vexing tension in how the law works — if that word can be used — in that the banned firms say they are using ESG in the proper sense to manage risk, while Texas officials dismiss it as mere imposition. of left values. In doing so, the state has effectively adopted that nimble act of blindfolding and sticking fingers in ears at the same time.

Because even if one doesn’t like the idea that a major industry in one’s country – oil and gas – faces existential risk from efforts to curb climate change, this situation is impossible to deny. This is exactly why the biggest oil and gas firms that reside there no longer deny it. In a nice twist, on the same day that Texas released its version of the index ban, it emerged that California would ban gasoline cars by 2035. Now, of course, one could say that the policy is wrong or too expensive; this is a valid debate. But to say that firms that lend to or invest in the oil industry shouldn’t take into account the largest U.S. auto market — which also sets the regulatory agenda in many other states — curbs the biggest source of demand for oil. it’s just illusion.

Or, to put it another way, it’s a values-based boycott. Like SRI. And like SRI, limiting the options of Texas pension funds and municipal issuers will come at a cost. This is how SRI works: You withhold dollars and thereby increase the cost of capital for your chosen target, but in doing so take a hit to your risk-adjusted returns (see this). In the case of Texas, another law targeting firms shamed for doing business with gunmakers has already cost its taxpayers half a billion dollars, according to a paper published this summer. Did I compare these laws to socially responsible investing? The fiscally irresponsible event may be closer to the point.

More from other writers at Bloomberg Opinion:

• Matt Levine’s Money Stuff: AMC’s APEs May Stick Around

• A California winery is fudging climate change: Amanda Little

• Did Congress Really Reject the Supreme Court on Climate?: Noah Feldman

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’ Lex column.

More stories like this are available at bloomberg.com/opinion

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