Ohio’s public pensions should be free to consider all relevant factors, including ESG, to make informed investment decisions.

Proposed bill to hamstring pensions threatens Ohio’s economic stability and long-term progress

By Tinu Okotore,

Ohio Capital Journal / newsbreak.com
July 11, 2024

Ohio Senate Bill 6 threatens our state’s financial health, economic stability, and long-term progress by prohibiting state pension systems from considering Environmental, Social, and Governance (ESG) factors in their investment decisions.

The value of ESG investing

ESG investing allows businesses and investors to consider Environmental, Social, and Governance factors in their decision-making. These criteria are not just trendy buzzwords but are crucial components of long-term economic health and stability. Ignoring these factors can lead to severe financial and social consequences, such as increased climate-related disasters, social unrest, and economic inequality. ESG investing helps identify companies that manage risks effectively and are positioned for sustainable growth, benefiting investors and society.

Debunking the fiduciary duty myth

Proponents of SB 6 argue that ESG considerations conflict with fiduciary duties to maximize returns. This perspective is fundamentally flawed. ESG investing involves recognizing and managing long-term risks and opportunities that traditional financial analysis may overlook. Companies with poor environmental practices face regulatory fines, litigation, and reputational damage, which can negatively impact financial performance. By considering ESG factors, investors can identify companies likely to perform well over the long term, thus fulfilling their fiduciary duty.

Economic benefits of ESG investments

Research consistently shows that ESG-focused investments can achieve competitive returns while managing risk more effectively. Morgan Stanley reported that in 2023 — a year riddled with volatility and recession — funds focused on “environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.” Sustainable funds had a return of 6.9%, nearly double that of traditional funds’ 3.8% rate of return. Ignoring ESG factors can lead to investments in companies that may suffer from future environmental or social liabilities, ultimately harming returns. Ohio’s public pensions, which support millions of retirees, should not be restricted from considering these critical factors.

Climate change: a real financial risk

Critics argue that ESG policies, such as net-zero emissions goals, impose rigid political agendas on businesses. However, climate change is a significant financial risk that cannot be ignored. The increased frequency of extreme weather events, regulatory changes, and shifting market dynamics pose substantial business risks. By incorporating climate considerations into investment strategies, fiduciaries are not engaging in political activism but are fulfilling their duty to manage long-term risks.

Enhancing transparency and accountability

Contrary to the claims made by SB 6 proponents, ESG investing enhances transparency and accountability. Companies that disclose their ESG practices are more likely scrutinized and held accountable by investors and the public. This transparency improves corporate governance and ethical business practices, benefiting investors and society.

Public pensions: balancing returns and social impact

Public pensions are not just about maximizing returns; they are also about ensuring the financial security of retirees while considering the broader impact on society. By restricting ESG investments, SB 6 undermines the ability of Ohio’s public pensions to invest in a way that aligns with the values and long-term interests of Ohioans.

Parallels with the Chevron doctrine overruling

The recent overruling of the Chevron doctrine is reminiscent of broader attacks on ESG and responsible investing initiatives. Just as the decision undermines the authority of federal agencies to enforce critical regulations, the push against ESG frameworks seeks to limit the factors that businesses can consider in their strategic planning. Both movements are driven by a desire to reduce regulatory oversight and shift decision-making power away from specialized agencies and enterprises to less experienced or ideologically driven entities.

Conclusion

SB 6 is a step backward for Ohio. It ignores the growing evidence that ESG considerations are essential for managing risk and achieving sustainable returns. Ohio’s public pensions should be free to consider all relevant factors, including ESG, to make informed investment decisions.

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