Last week, the Texas Senate Committee on State Affairs hosted hearings last week in Marshall, Texas where they questioned representatives from financial firms Blackrock, ISS, and StateStreet, in an effort to combat E.S.G. practices happening around the country.

A few months ago, Texas Comptroller Glenn Hegar announced that Texas would boycott 10 major financial firms, including the four mentioned, and almost 350 investments, Texas state funds were invested. For Texas, this is the state’s pension funds and The Permanent School Fund. The Permanent School Fund is one of the largest if not the largest school fund in the United States. The financial firms listed were accused of boycotting the oil and gas industry by encouraging investment in ESG funds that are anti-oil and gas. 

Texas and other Republican-led states are standing on the position that ESG practices violate the fiduciary responsibility of these companies to grow the financial assets of their customers. Their argument is that ESG funds will be placed over non-ESG funds that might be more profitable such as oil and gas. They do not want their state funds to lose value to ESG. Texas‘s biggest problem with companies promoting ESG practices is that they will divest away from oil and gas, the state’s largest economic power tool. 

Additionally, other states that promote natural gas and oil production are divesting away from ESG. The top major financial firms such as Blackrock, Vanguard, ISS, and StateStreet, have lost hundreds of billions from the divestment of these Republican-led states, including Florida. 

The Texas committee claims that boycotting oil and natural gas, the nation’s largest sources of energy powering millions, can threaten infrastructure and national security. The State Committee pointed out that if energy projects are not being built because they are not being invested in, then it becomes more scarce, energy prices go up, other prices go up, etc. 

The representatives across the different companies were clear that they do not force anyone’s investment. Representatives of these companies at the hearing informed that they only advise their clients on options and the risks involved in certain investments. The representative from Blackrock, handling 8 trillion in assets, pointed out that the firm has around 100 million invested in fossil fuels. 

What is Environmental Social Governance? ESG focuses on a company‘s social policies, and environmental policies, and allows investors to know what type of company they’re investing in. “ESG is a type of investing that measures a company’s sustainability with non-financial factors such as the diversity of its board of directors, executive pay, lawsuits, lobbying, and political contributions,” wrote the Pittsburg Post Gazette. Some see ESG as an excellent way for companies to take care of their employees and take good care of the climate, and the community around them. 

The focus in this case is climate change. The push for decarbonizing the planet by 2050 has grown popular in the western world, and the financial firms represented at the hearing signed onto the Net Zero Asset Managers initiative for businesses to declare they are cutting carbon dioxide from the atmosphere. However, Vanguard has recently pulled away from all that, in response to pressure from the states. 

Opponents point out that ESG funds are more expensive and less financially rewarding, and not all companies that follow them have good compliance with labor and environmental laws.

A report by the Harvard Business Review, and a report by the Journal of Finance, show that ESG  funds do not outperform non-ESG. funds. They are more expensive and they do not provide a better return. “Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds, said the Harvard Business Review (HBR). 

The Review of Accounting Studies also shows that ESG funds underperform non-ESG funds and are more expensive. They additionally point out that ESG funds do not actually have good compliance with environmental and labor laws. ESG stocks are more likely to disclose carbon emissions standards, but at the same time have higher carbon emissions. ESG scores focus on ESG disclosure and statements, not company practice. 

“We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions,” wrote the Review of Accounting Studies. “Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.”

Two researchers from the universities of Northern Iowa and South Carolina show that when companies underperform, they are more likely publicly discuss their ESG initiatives. When they overperform, they rarely talk about them. They do not have, to keep up investment and public approval. “Collectively, our findings suggest that the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance.”