When it comes to environmental, social, and governance (ESG) issues, the new strategy for companies and investors is like the first rule of Fight Club. Don’t talk about it. Yet, ESG is everywhere. European companies are pushing back on stringent ESG regulations, warning that the policies are harming shareholder value and global competitiveness. The House Financial Services Committee recently held a hearing on failed ESG standards and ESG is the core theme of the third season of HBO’s hit series Industry. The reality is until federal and state policymakers safeguard pensions and investments from politicization, ESG will remain contentious. 

For most Americans, ESG is an unfamiliar term. A poll last year found that 78 percent of those surveyed had never heard of the ESG or were unsure of what the acronym actually means. A separate poll found that only 7 percent of voters heard a lot about ESG.

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They’re not alone. ESG can be unclear for the companies, investors, and policymakers who follow the issue closely. The regulations and mandates that guide or enforce ESG can be complicated, subjective, and opaque. As a result, critics from the left and the right have labeled ESG everything from woke finance to corporate greenwashing. 

The fact that most Americans have little understanding of ESG makes it that much more dangerous. In a new report for Centerline Liberties, a non-profit dedicated to protecting free markets and individual liberties, senior advisor Tim Doyle outlines that both pro-ESG regulations and mandates and anti-ESG policies and bans can have adverse effects on investors, retirees, and the health of the economy. Blue states forcing divestment of fossil fuel stocks can harm state pension plans while having negligible impact on greenhouse gas emissions or the health of an oil company’s stock. Red states have proposed anti-ESG legislation that prohibits state entities from entering into contracts with banks that boycott fossil fuels. Meanwhile,the state will develop and maintain a blacklist of companies that boycott fossil fuels.

The problem with these pro- and anti-ESG policies and regulatory actions is that they could fail to achieve their stated economic and environmental objectives by reducing choice and enabling states to dictate which banks, contractors and other businesses can and cannot do business with state and local jurisdictions. Such restrictions could run counter to fiduciary responsibility, contractual obligations, and undermine the ability of asset managers to prioritize risk-adjusted returns, thereby harming retirees. Reducing the number of banks and contractors reduces competition and options for these services, which will consequently increase borrowing costs and raise fees for government procurement projects.

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Doyle, who testified at the House Financial Services Committee hearing, writes, “Whether it’s too narrowly defining the proper use of pecuniary/financial factors or addressing perceived boycotts through mandating divestment, anytime constraints are imposed on assessing risks or opportunities for long-term value creation, there will almost certainly be added costs and unforeseen consequences.” 

The economic consequences of bad ESG policy can trickle down to American families, by harming investments, retirement accounts, and raising prices. If government actions nudge or force lenders to avoid certain industries, like oil and natural gas, ESG policies can restrict supply and increase energy bills. 

France’s oil major TotalEnergies CEO remarked that ESG policies have capped gains and hurt their comparative advantage. Exxon, meanwhile, which has taken a more aggressive strategy with oil and gas investment, has had its stock double in the past three years. Much of that stock is held by American families in their retirement accounts. Bloomberg reported that “[t]he French oil giant isn’t alone in pointing to the skewing effect of ESG regulations that critics say have put European businesses at a competitive and valuation disadvantage to their US peers, with potentially long-lasting effects for the bloc’s economy.” 

If U.S. policymakers follow suit with more aggressive ESG regulations, underinvestment in oil and gas development will harm America’s competitive advantage as a global energy superpower. Similarly, state proposals to ban certain banks that consider ESG from operating in their borders will reduce competition and raise borrowing costs, harming the health of the state’s economy. 

Tal Lomnitzer, a senior investment manager at Janus Henderson Investors, told Bloomberg that Europe’s approach is “telling companies what to do.” The United States needs adopt a different strategy. Protecting Americans’ investment and retirement accounts should be a top priority for lawmakers, and a noncontroversial one at that. The path to doing so is by reducing government interference in investment strategies and empowering market actors to make their own choices. 

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.