Column: Republicans oppose free markets to spur investment in green energy
For some time, investment fund managers have considered it prudent to take climate risk into account, along with other factors, in their decision making.
Congressional Republicans want to block him from doing so, arguing that the approach is guided by ideology rather than duty to investors.
Think about that for a second. The claim here is that making money on Wall Street is taking a back seat to the notion of political correctness.
Republicans, and some Democrats in large fossil-fuel producing states, have made dubious claims that a relatively new Labor Department rule allowing retirement funds to consider environmental and social factors in investing could jeopardize the financial future of millions of seniors. Could
There is some analysis from surprising sources that the opposite is the case. Nevertheless, a Republican-backed bill to reverse the rule made it to President Joe Biden’s desk, giving him his first veto.
Similar proposals to restrict so-called ESG (environmental, social and governance) investments are being advanced in various Republican-controlled states. Yet reports prepared by governments in Indiana and Kansas — hardly liberal bastions — restricting consideration of such factors could cost pension funds billions of dollars.
According to Pensions & Investments, if legislation passed by state legislative committees becomes law this year, the Indiana Public Retirement System would be prohibited from investing with money managers that consider ESG factors.
Indiana’s Legislative Services Agency Office of Financial Management and Analysis suggested that the bill is indeed a loser.
As a result of the law, the state’s $43.7 billion pension fund “could reduce total investment returns for defined benefit and defined contribution funds of systems managed by INPRS by a total of $6.7 billion over the next 10 years,” the office said in a report.
According to Reuters, the Kansas Budget Department had reached a similar conclusion regarding an anti-ESG bill pending in that state.
An analysis by the Department of the Budget states that if the proposal becomes law, the Kansas Public Employees’ Retirement System investment portfolio returns “will be reduced by $3 billion over the next ten years compared to existing investment portfolios”.
A tendency to get lost in the debate at the federal level is that Department of Labor regulations simply allow, but do not require, climate and social considerations to be taken into account.
“Retirement planning facilitators should be able to consider any factors that maximize financial returns for retirees across the country,” Biden said in his veto message. “It’s not controversial—it’s common sense.”
Opponents talk as if fund managers will be forced to go the ESG route.
Sen. Joe Manchin, DW.Va., said keeping the regulation in place would “undermine our energy, national and economic security while jeopardizing the hard-earned retirement savings of 150 million West Virginians and Americans.”
Manchin was joined by Sen. Jon Tester, D-Mont., in voting with Republicans, allowing the bill to exit the Senate.
Despite the Indiana and Kansas assessments, data has shown that despite incredible growth in recent years, ESG funds have underperformed other investment funds recently. In late 2020, the Trump administration enacted regulations that essentially blocked ESG consideration. The Biden Rule reverses this.
The assumption behind Manchin’s remarks is that increased investment in alternative energy sources could mean less investment in the fossil fuel industry.
Certainly, a rapid reduction in US greenhouse gas emissions that contribute to global warming may be warranted. However, if the rapid depletion of fossil fuels leaves a gap before the need for clean energy rises rapidly, it will be a problem.
But the idea that not enough alternative energy technology will be ready and that the transition could be too costly is being challenged.
New York Times business columnist Peter Coy cited a peer-reviewed article titled “Empirically Grounded Technology Forecasts and the Energy Transition” in the scientific journal Joule, which argues that “in rapid transitions, we may soon move to low-cost likely to reach.”
“Rapid replacement of fossil fuel technologies by low-cost major green technologies – particularly in electricity and transportation – will cause expected annual energy system costs in 2050 to be $514 billion cheaper for the Fast Transition scenario than for the No Transition scenario cheaper, although the distribution of potential costs for fast transition is wider,” the article said.
It is almost certainly too late to prevent Earth’s climate from warming 1.5 °C (2.7 °F) above the pre-industrial average. This is a critical “tipping point” that scientists say will lead to the extinction of species, irreversible melting if ice sheets and sea level rise and more extreme weather occur. That limit is expected to be reached by the early 2030s, if not sooner.
The United Nations on Monday issued another grim report about global warming, but suggested limiting the rise to 1.5 degrees Celsius could prevent much catastrophe.
In 2021, Marketwatch reported that global insurer Swiss Re estimated that the world economy was at risk of losing more than 18 percent of GDP by 2048 if no action was taken on the climate crisis.
All of this underscores why efforts to undermine free markets by restricting the idea of climate risk are so complicated.
The Washington Post reported that Larry Fink, CEO of BlackRock investment management company, has become a target of Republican lawmakers for embracing ESG investing. But he said in a letter to investors that the firm would continue to invest in natural gas pipelines, adding that the asset managers are not “environmental police”.
But he added that BlackRock has for years viewed climate risk as an investment risk. “This is still the case,” he wrote.
Perhaps lawmakers would be better off spending their time figuring out how to transition from fossil fuel alternatives to avert the worst-case scenario of climate change, rather than deciding what money managers should do .