Economic freedom means the freedom to conduct your affairs without government interference. Can a law restricting banks increase economic freedom? In the case of Alabama’s Senate Bill 261, the “anti-ESG” bill, I think the answer is yes.
Let’s start by explaining ESG. The letters stand for environmental, social and governance. Environmental largely, but not exclusively, regards climate change; social refers to diversity, equity, and inclusion-related issues; and governance refers to corporate structure, such as the composition of a board of directors. An ESG investing strategy considers social as opposed to just financial returns.
All market economy activity is voluntary. Savers can invest however they wish without approval from any authorities. Economists model investors as maximizing returns (or balancing the risk of loss and return) when studying financial markets, but investors need not do this.
Banks and financial institutions are intermediaries in the investment market, connecting investors with businesses seeking funding. If enough investors value ESG, financial institutions will offer ESG-focused investment opportunities. If Senate Bill 261 kept Alabamians from making ESG investments, this would reduce economic freedom.
But Washington is pushing ESG through regulation. For example, the Department of Labor now allows pension managers to invest based on ESG. Two executive orders task agencies with pushing ESG across the federal government, and the Securities and Exchange Commission has proposed climate change disclosure rules.
Regulations are relatively modest so far, but two actions portend looming ESG mandates.
First, Washington seeks to standardize the hundreds of ESG ratings. These metrics focus on different aspects of E, S and G and measure them differently. Interested investors can seek out ratings aligning with their vision of socially responsible investing.
Multiple ESG metrics are problematic for enforcing compliance. A rule “debanking” a business without a good score on at least one ESG measure means little; coal companies or gun manufacturers could pay someone to construct a metric yielding them a good score. A small number of government-approved ratings is necessary for an ESG mandate with teeth.
Second, the Trump Administration’s Fair Access to Financial Services rule forbids political viewpoint discrimination. The fact that President Joe Biden is overturning this rule suggests that such discrimination is coming.
Senate Bill 261 attempts to counter the federal regulation, banning financial institutions implementing ESG from state business. Several other red states have similar measures, and various Republican governors and attorneys general, including Alabama’s Kay Ivey and Steve Marshall, are pushing back on ESG.
But several leading Alabama banks appear to oppose Senate Bill 261. I can sympathize with their plight. They are stuck in a regulatory crossfire between a federal government which may soon mandate ESG and states which seemingly want to forbid ESG. Both sides should let banks keep our economy functioning and growing, but Washington insists on pushing ESG.
Let’s consider now the premise of promoting social good instead of financial return. While this sounds benign, it is troublesome.
The United Nations has pushed ESG, beginning with the Principles for Responsible Investment and its publication, “Who Cares Wins,” pressuring financial institutions to adopt the Principles. But the money financial institutions manage does not belong to U.N. Secretary General António Guterres or ESG proponents like BlackRock’s Larry Fink and Bank of America’s Brian Moynihan. It belongs to millions of Americans and others across the globe.
Why do investments in oil yield higher returns than investments in alternative energy absent significant government subsidies for the latter? Because people and businesses will pay to fly on airplanes, to ship goods by truck or cargo ship, and for gas-powered cars. Returns on investment arise from the buying decisions of people like you and me.
People like Guterres want to override our choices. ESG proponents want to spend other peoples’ money in pursuit of their vision of a better world. Legally mandated ESG changes who directs investment, and by extension, the economy.
Washington elites are all-in on ESG and seemingly beyond Americans’ control. State measures like Senate Bill 261 are pushing back. Creating a regulatory crossfire for banks is not optimal. But red states must either return Washington’s fire or surrender without firing a shot.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University or 1819 News. To comment, please send an email with your name and contact information to [email protected].
Don't miss out! Subscribe to our newsletter and get our top stories every weekday morning.