Arguments About Environmental, Social, And Corporate Governance (Esg)

Thesis: ESG enhances business and investment goals

This thesis argues that adopting ESG principles leads to improved business and investment outcomes by fostering long-term stability, profitability, and risk mitigation.

Argument: ESG enhances investment outcomes

This argument claims that ESG practices enable businesses and investors to achieve better financial results by mitigating risks, reducing borrowing costs, and ensuring compliance with regulations.

Claim: ESG strategies can outperform the market in the long term

The following statements posit that companies prioritizing ESG mitigate risks effectively, enhancing long-term financial performance.

• Analysts John Rotonti and Alyce Lomax wrote, "It's time to put to rest the conventional wisdom that investing for anything other than shareholder value results in poor investor outcomes. There's plenty of evidence that companies prioritizing ESG issues actually generate superior long-term financial performance across a range of metrics -- including sales growth, return on equity (ROE), return on invested capital (ROIC), and even alpha (market outperformance)."^[38]

• Rotonti and Lomax also wrote, "When companies pursue a stakeholder-centric approach to value creation by incorporating ESG into their long-term investment strategy, they're able to attract the best talent, build loyal customer bases, prosper through strong corporate governance oversight, mitigate risk, and drive profitable growth by investing in sustainable innovations that positively impact the world."^[38]

• Matthew Heimer, the lead editor for Fortune, wrote, "There's a growing body of evidence to suggest that stocks of companies that meet high standards for environmental, social and governance factors (ESG) are actually likely to outperform the market. In other words: Investors can do well by backing companies that do good. Data from asset management start-up Arabesque, for example, found that S&P 500 companies that ranked in the top quintile for ESG factors outperformed those in the bottom quintile by more than 25 percentage points between the beginning of 2014 and the end of June 2018, while their stock prices were less volatile. Other research, from organizations including consulting giant McKinsey & Co. and advocacy group JUST Capital, has reached similar conclusions."^[39]

• An investor relations article from Morgan Stanley said, "We believe sustainability creates business value. A growing body of research demonstrates that resource-efficient companies produce higher financial returns than benchmark indexes. They also exhibit higher levels of innovation and corresponding margins, returns on assets and returns on equity. A 2015 Harvard Business School study of more than 2,300 firms found that companies that commit to and invest in strategic sustainability efforts have higher risk-adjusted stock performance, sales growth and margins -- and that these sustainability activities drive business value."^[40]

• An article on the Impact Investor website said, "By recognizing that capital allocation makes a real impact on the environment, investors can hope to make healthy long-term investment decisions. Through rigorous research, one can identify businesses with the right ESG metrics and invest in them to ensure environmental and social responsibility."^[41]

• An article on the Impact Investor website said, "Another effective reason why ESG investing is important is that ESG stocks not just perform well over time but also minimize risk options for investors. If an investor or consumer can evaluate a genuine ESG firm, they will most likely be taking on a less risky investment. Since ESG focused businesses are committed to adhering to government regulations and following a fair ESG framework, they tend to be less volatile and have stronger reputations."^[41]

• Hari Bhambra wrote, "For some investors, the lower risk offered by these investments makes them even more attractive. Stronger governance, as highlighted above, may also lead to sustainable businesses that could improve investor confidence. Investment with a value can actually result in strong and sustainable commercial value."^[42]

Claim: ESG doesn't harm investment returns

The following statement posits that ESG investing strategies do not damage financial returns.

• PitchBook, a market research company that provided information for investment banking, private equity, and venture capital firms, released a report March 21, 2024, arguing that ESG investment strategies did not harm returns. The report said, "The financial performance of ESG-committed asset managers varies, but quantitative evidence that the use of ESG in the private markets necessitates sacrificing returns has not emerged."^[43]

Claim: Investment strategies must consider environmental risks and opportunities

This claim argues ESG considerations are critical for managing downside risks and capitalizing on upside opportunities.

• Maryland Comptroller Brooke Lierman said, "When I think about risk and securing our pension funds, that includes climate risk, managing human capital risk issues, and more."^[44]

Argument: ESG improves core business functions

This argument claims that ESG principles drive internal operational improvements, including enhanced employee engagement, cost savings, and supply chain efficiency.

Claim: ESG reduces risks that can hurt businesses

The following statements posit that ESG practices reduce risk, making companies that practice it better options for loans and other financial services.

• Denisa Avermaete, a senior policy adviser for the European Banking Federation, argued reduced ESG regulations in Europe would hurt banks and lending practices. She said reduced regulations would "introduce complexity and a need for bilateral engagement, as banks will always need certain key data that is necessary for sound business and risk management."^[45]

• Ashish Lodh wrote, "In the MSCI World Index, the average cost of capital of the highest-ESG-scored quintile was 6.16%, compared to 6.55% for the lowest-ESG-scored quintile; the differential was even higher for MSCI EM. Previously, we have found that high-ESG-rated companies have been less exposed to systematic risks — i.e., risks that affect the broad equity market or market-like sectors or industries — than low-ESG-rated companies. This finding is consistent with the capital asset pricing model (CAPM), where lower systematic risk (beta) implies lower cost of equity. Similarly, we found that the average cost of debt of high-ESG-rated companies was lower than that of low-ESG-rated companies. This was in line with expectations, as the corporate-governance standard, one of the pillars of ESG, is known to reduce a firm's default risk, which directly impacts its cost of debt."^[46]

• An article on the VelocityEHS website said, "Attracting the attention of investors and lenders is one of the biggest advantages of having an ESG program. It seems no matter where you look for ESG benefits, the top thing that comes up is that investors and lenders are gaining interest in companies with an ESG program in place over those without. Study after study has shown companies that made ESG a priority stand out to both investors and lenders because they tend to outperform their competition."^[47]

Claim: ESG ensures compliance with emerging government regulations

The following statements posit that adopting ESG practices positions businesses to stay ahead of regulatory trends, avoiding penalties and ensuring operational continuity.

• An article on the Impact Investor website said, "Another effective reason why ESG investing is important is that ESG stocks not just perform well over time but also minimize risk options for investors. If an investor or consumer can evaluate a genuine ESG firm, they will most likely be taking on a less risky investment. Since ESG focused businesses are committed to adhering to government regulations and following a fair ESG framework, they tend to be less volatile and have stronger reputations."^[41]

Claim: ESG boosts employee engagement, satisfaction, and productivity, which enhances overall business performance

The following statements posit that ESG fosters a more committed and motivated workforce, improving business outcomes.

• An article on the Impact Investor website said, "Another reason why ESG investing is important is that it can help businesses engage and retain quality employees, boost employee motivation by giving a sense of purpose, and increase overall productivity. Employee satisfaction is entirely linked to shareholder returns. Also, it has been seen that staff with a sense of not only satisfaction but also connection perform better. Moreover, the more robust an employee’s belief of impact on the beneficiaries of their work, the better their motivation to work in a 'prosocial' manner."^[41]

• An article on the VelocityEHS website said, "Today, many job seekers are no longer looking for just a paycheck. They want to enjoy their jobs, feel appreciated, and make a positive impact. Working for a company with strong ESG goals appears to be the top factor for employees’ job satisfaction, along with evidence that the company “walks the walk” by putting its stated goals into practice. Adding to that, the “Great Resignation” has shown many employers that at least some of their employees have other options, and will use them if their current job doesn’t fulfill their needs and values."^[47]

Claim: ESG practices can cut costs and improve supply chain prospects, contributing to profitability

The following statements posit that integrating ESG into operations reduces costs and creates more resilient supply chains.

• An article on the VelocityEHS website said, "Much like investors are paying more attention to ESG, many companies are looking for supply chain partners that embrace sustainability efforts. For example, many retail stores are making decisions not to stock products made by companies considered to have poor ESG performance. Companies’ supply chains have an effect on the environment, people, and society, so companies that take their ESG goals seriously find it to be in their best interest to partner with suppliers who share the same vision. Multiple large companies have already made the move to implementing ESG, making it more beneficial for them to partner with suppliers that have an ESG program in place, as well as easier to attract partners who insist on better ESG performance as a condition for partnership."^[47]

• An article on the Impact Investor website said, "ESG can also minimize costs substantially. Besides other benefits, incorporating ESG practices effectively can help companies cut down greenhouse gas emissions and deal with rising operating expenses. Overall, you can significantly lower utility costs and demonstrate good practice by implementing eco-friendly facilities across your business structure."^[41]

Claim: ESG can foster stronger customer loyalty

The following statements posit that ESG programs can improve goodwill towards companies and boost customer loyalty as a result.

• Christine Lellis wrote, "Customers, too, want to know that the businesses they’re supporting are good stewards of the environment. ESG performance is a major predictor of customer loyalty; one study found that 88% of consumers will be more loyal to a company that supports social or environmental issues. But today’s consumers are savvier than ever before, and they can see through greenwashing. That’s true for both B2C and B2B customers. For this reason, organizations have begun shunning fluffy, feel-good sustainability narratives in favor of evidence-based ESG targets."^[48]

Claim: ESG commitments promote innovation

The following statements posit that ESG commitments such as cutting carbon emissions can force companies to innovate faster than they otherwise would, setting them up for stronger future growth.

• An article on the Quantive website said, "Depending on your industry, ESG commitments are challenges that you must overcome. If you are in manufacturing for instance, energy efficiency and waste management will be two of your primary ESG concerns. But instead of framing these challenges as an inconvenience to your business, you can change your perspective to use it as an opportunity for innovation. After all, solving problems should be the primary reason for a business's existence in the first place. In addition, external pressure from stakeholders is going to force you to address these issues regardless, so it makes more sense to embrace the opportunity. Use ESG pressure as a mechanism to unlock the creative ability of your team. Make your processes more environmentally friendly and come up with business models and products that have greater social impact. Eventually, it’s these green products and processes that will displace less sustainable practices."^[49]

Thesis: ESG promotes healthier political and economic structures

This thesis argues that ESG aligns business practices with the broader interests of society, fostering inclusivity and balancing profit with community well-being.

Argument: Stakeholder capitalism brings more voices into decision-making

This argument claims that ESG promotes stakeholder capitalism, which ensures that employees, consumers, and communities have a say in corporate decision-making.

Claim: ESG frameworks encourage inclusive governance and platform diverse perspectives

The following statements posit that ESG frameworks encourage inclusive governance by factoring in diverse perspectives.

• An article on the ESG the Report website said, "The best way to fix this problem [of companies pursuing short-term profit] is to democratize companies so that they are controlled by all of their stakeholders rather than maximizing the profits of a tiny group of shareholders. This is known as Triple Bottom Line and requires changing corporate laws, tax laws and regulatory policies in ways that will empower employees with real bargaining power. It is now imperative that shareholders encourage companies to invest in long-term value instead of extracting value, and create a more sustainable financial system that isn't so focused on speculative bubbles."^[50]

Thesis: ESG helps promote social and environmental responsibility

This thesis argues that ESG encourages businesses to adopt responsible practices, address global challenges like climate change, and foster stronger consumer relationships.

Argument: ESG is good for the environment

This argument claims that ESG drives direct contributions to environmental sustainability through innovation, emission reduction, and societal benefits.

Claim: ESG helps cut carbon emissions, directly contributing to climate goals

The following statements posit that ESG-aligned companies actively reduce their environmental footprint and help achieve sustainability targets.

• An article on the Impact Investor website said, "Besides other benefits, incorporating ESG practices effectively can help companies cut down greenhouse gas emissions and deal with rising operating expenses. Overall, you can significantly lower utility costs and demonstrate good practice by implementing eco-friendly facilities across your business structure."^[41]

• Joe Speicher wrote, "The global economy has been structured on an energy system dependent on fossil fuels to power the means of production. This system has yielded great benefits—specifically incredible economic growth—which, however, have come with great costs—one of which has manifested in climate change. Environmental initiatives encourage companies to adopt sustainable operating models, like using renewable energy, sourcing sustainable materials, reducing waste, and greening supply chains. These efforts can reduce the amount of carbon emissions associated with economic growth."^[51]

• Joe Speicher wrote, "As more companies embrace ESG, equality will increase and emissions will decrease, which is ultimately good for society and the planet. The new SEC rules will speed up the process. Companies are joining movements like the UN’s Race to Zero Campaign and The Climate Pledge and committing to become carbon neutral by doing things like buying renewable energy and carbon offsets, like Autodesk has. With every company doing its part, the world will be better off."^[51]

Claim: ESG commitments promote innovation that leads to more sustainable business models

The following statements posit that ESG inspires businesses to create innovative solutions that balance profitability with environmental responsibility.

• An article on the Quantive website said, "Depending on your industry, ESG commitments are challenges that you must overcome. If you are in manufacturing for instance, energy efficiency and waste management will be two of your primary ESG concerns. But instead of framing these challenges as an inconvenience to your business, you can change your perspective to use it as an opportunity for innovation. After all, solving problems should be the primary reason for a business's existence in the first place. In addition, external pressure from stakeholders is going to force you to address these issues regardless, so it makes more sense to embrace the opportunity. Use ESG pressure as a mechanism to unlock the creative ability of your team. Make your processes more environmentally friendly and come up with business models and products that have greater social impact. Eventually, it’s these green products and processes that will displace less sustainable practices."^[49]

Claim: Business-to-business ESG pressure encourages widespread environmental responsibility

The following statements posit that ESG practices create a ripple effect, compelling other businesses to adopt environmentally responsible behaviors.

• An article on the VelocityEHS website said, "Much like investors are paying more attention to ESG, many companies are looking for supply chain partners that embrace sustainability efforts. For example, many retail stores are making decisions not to stock products made by companies considered to have poor ESG performance. Companies’ supply chains have an effect on the environment, people, and society, so companies that take their ESG goals seriously find it to be in their best interest to partner with suppliers who share the same vision. Multiple large companies have already made the move to implementing ESG, making it more beneficial for them to partner with suppliers that have an ESG program in place, as well as easier to attract partners who insist on better ESG performance as a condition for partnership."^[47]

• Joe Speicher wrote, "ESG investing is a spectrum. Companies typically begin their ESG journey for compliance reasons, which is simply to 'do less bad.' They’re offsetting carbon and starting diversity initiatives to check certain boxes. But compliance is the gateway drug for authentic ESG and 'doing more good,' paired with the realization that business doesn’t do well when society isn’t doing well."^[51]

Argument: ESG commitments are good for society

This argument claims that ESG frameworks compel businesses to acknowledge their societal impacts, driving meaningful action.

Claim: ESG compels companies to solve problems facing society

The following statements posit that ESG frameworks compel businesses to address societal issues, promoting long-term sustainability.

• An article on the Quantive website said, "Depending on your industry, ESG commitments are challenges that you must overcome. If you are in manufacturing for instance, energy efficiency and waste management will be two of your primary ESG concerns. But instead of framing these challenges as an inconvenience to your business, you can change your perspective to use it as an opportunity for innovation. After all, solving problems should be the primary reason for a business's existence in the first place. In addition, external pressure from stakeholders is going to force you to address these issues regardless, so it makes more sense to embrace the opportunity. Use ESG pressure as a mechanism to unlock the creative ability of your team. Make your processes more environmentally friendly and come up with business models and products that have greater social impact. Eventually, it’s these green products and processes that will displace less sustainable practices."^[49]

Claim: Stakeholder capitalism benefits society by balancing shareholder interests with the public good

The following statements posit that ESG principles harmonize corporate objectives with societal well-being, ensuring equitable outcomes.

• An article on the ESG the Report website said, "This is a win-win situation for shareholders and stakeholders because they share the same interests. This is known as stakeholder capitalism, which puts business at the service of society by creating a system where businesses operate in ways that benefit all major constituencies, not just shareholders. Stakeholder relationships are reciprocal - it's not one way."^[50]

• An article on the ESG the Report website said, "Shareholder capitalism runs counter to our shared values of democracy, equality and fairness. Decision-making power in corporations should be shared- not hoarded by a tiny group of shareholders who don't care about the environmental or social impact of its business operations. The negative effects of shareholder capitalism are readily apparent and include labor exploitation, shareholder enrichment and unsustainable growth. It's long past time for shareholder capitalism to be replaced by a more sustainable model of economic production."^[50]

Claim: ESG compliance helps businesses recognize that societal health is directly connected to business success

The following statements posit that ESG frameworks demonstrate how societal well-being contributes to long-term business viability.

• Joe Speicher wrote, "ESG investing is a spectrum. Companies typically begin their ESG journey for compliance reasons, which is simply to 'do less bad.' They’re offsetting carbon and starting diversity initiatives to check certain boxes. But compliance is the gateway drug for authentic ESG and 'doing more good,' paired with the realization that business doesn’t do well when society isn’t doing well."^[51]

This section highlights current conflicts related to state and local policies, highlighting arguments in favor of the policies, counterarguments against the policies, and responses to the claims against the policies. Click one of the conflicts below to learn more.

• The debate over Oklahoma's anti-ESG law
  Read more
• The debate over the Texas Permanent School Fund's divestment from BlackRock
  Read more
• The debate over California's climate disclosure requirements
  Read more
• The debate over NYC's fossil fuel divestment
  Read more

The debate over Oklahoma's anti-ESG law

Oklahoma's Energy Discrimination Elimination Act (2022) prohibits state agencies from contracting with financial firms that boycott fossil fuels in the state treasurer's assessment. A November 2023 lawsuit challenged the act, asking courts to block its enforcement. An Oklahoma district court judge issued a permanent injunction against the law in July 2024, and Oklahoma Governor Attorney General Gentner Drummond (R) appealed the ruling to the state Supreme Court in December 2024.

Proponents argue the law protects important industries from coordinated opposition and ensures investment decisions prioritize financial returns. Critics argue the law breaches fiduciary duties, raises borrowing costs, and infringes on free speech.

This section presents arguments on both sides of the debate relevant to the broader national conflict over ESG policies and the public policy landscape. Click an argument below to learn more.

Claims

This section lists claims supporting the enactment of Oklahoma's anti-ESG law.

Anti-ESG laws protect jobs, tax revenue, and economic health

This claim argues that ESG investing approaches hurt industries (like fossil fuels) that are important to the economies of some states, and anti-ESG laws help protect jobs, tax revenue, and wealth generated from those industries.

• Oklahoma Representative Mark Lepak (R) argued, "ESG goals weaken industries important to Oklahoma’s economy, which means fewer jobs, which reduces our collective wealth and in turn reduces tax collections and everything tax dollars support."^[52]

Anti-ESG laws are necessary to ensure fiduciary responsibility and prevent nonfinancial or political decisions

This claim argues anti-ESG bills help protect public portfolio performance and prevent public funds from being invested for purposes other than maximizing financial returns.

• Paul Tice, senior fellow at the National Center for Energy Analytics, argued, "Even if ESG is not an explicit part of an investment management contract, asset owners such as OPERS are potentially exposing their portfolio performance to a sustainable investing framework and allowing their capital to be leveraged for ESG engagement purposes—both of which are problematic from a fiduciary perspective—unless their outsourced assets are tightly ring-fenced."^[53]

Anti-ESG laws prevent discrimination against industries disfavored by ESG activists

This claim argues coordinated ESG financing approaches threaten the ability of fossil fuel producers and other disfavored companies to raise and borrow money. Proponents of this claim say anti-ESG laws help prevent coordinated discrimination.

• Paul Tice argued, "These anti-ESG laws are mainly defensive moves aimed at protecting the in-state energy industry from the existential funding threat posed by the climate-driven sustainable finance movement."^[53]

Anti-ESG laws help keep fossil fuel production in America instead of shifting it overseas

This claim argues ESG investing and regulations shift fossil fuel production out of America to other countries, and anti-ESG laws keep America strong and independent.

• Jason Isaac, a former Texas House member and founder and CEO of the American Energy Institute, argued, "When we increase regulations in the United States, all we do is shift production to other countries. We don’t reduce demand, we just ship production. That’s why this ESG agenda is really the China ESG agenda. China is adding a coal-fired power plant every single week."^[52]

Counterclaims

This section lists counterclaims opposing the enactment of Oklahoma's anti-ESG law.

Anti-ESG laws raise borrowing costs for local governments

This counterclaim argues anti-ESG laws reduce options for local governments in seeking loans since they can't enter contracts with some large institutions on the state's restricted list. Proponents of this counterclaim say the reduced competition forces municipalities to borrow money at higher rates.

• Travis Roach, chairperson of the Department of Economics at the University of Central Oklahoma and founder of the Central Policy Institute, argued, "Policymakers should carefully consider these downstream impacts when evaluating the merits of anti-ESG legislation, because at present, it has caused a statistically significant and economically meaningful increase in borrowing costs."^[54]

Anti-ESG laws play politics with pension funds, conflicting with fiduciary duties

This counterclaim argues that anti-ESG bills introduce politics into investment decision-making, prevent fiduciaries from making investments exclusively for the benefit of beneficiaries, and harm investment returns.

• The 2023 lawsuit against Oklahoma's anti-ESG law argued, "By requiring state agencies to deal with financial institutions that do not boycott energy companies, the state is no longer expending state funds “in trust for the exclusive 10 purpose of providing for benefits, refunds, investment management, and administrative expenses,” but rather, expending state funds to make a political statement (i.e., the State of Oklahoma opposes boycotts of energy companies)."^[55]

• Tony DeSha, executive director of the Public Employees Association, argued, "We will not allow Todd Russ to play politics with state employees and retirees’ money. The pension system is not taxpayer money, it is compensation earned by active employees who currently pay into the system and the pensioners who contributed to the same system for decades."^[56]

The cost to implement anti-ESG laws conflicts with fiduciary duties

This counterclaim argues that the administrative costs to re-contract allocations from companies that violate anti-ESG laws to companies that comply conflict with fiduciary duties.

• The 2023 lawsuit against Oklahoma's anti-ESG law argued, "[A]ccording to the Oklahoma Public Employees Association, 'divesting from BlackRock and State Street would cost the pension system approximately $10 million, with the potential for even greater losses.' The lost pension funds caused by the Act are in direct contravention of Okla. Const. Art. 23, § 12 because the funds are no longer being held in trust for their 'exclusive purpose.'"^[55]

Anti-ESG laws infringe on the First Amendment

This counterclaim argues that people and businesses have a constitutional right to boycott companies and industries under the First Amendment, and anti-ESG laws illegally infringe on that right.

• The initial brief opposing Oklahoma's anti-ESG law in 2023 argued, "[T]he court in Koontz provided a detailed legal analysis as to why the plaintiff was correct. The court began by noting that '[u]nder the First Amendment, states cannot retaliate or impose conditions on an independent contractor 'on a basis that infringes his constitutionally protected freedom of speech.'" The brief said Oklahoma's law, which prohibited contracts with companies that boycotted fossil fuel companies, infringed on freedom of speech.^[55]

Anti-ESG definitions of energy boycotts are too vague

This counterclaim argues that laws defining illegal boycotts as "without an ordinary business purpose, refusing to deal with [or] terminating business activities with" a company or industry are too vague.

• The lawsuit opposing Oklahoma's anti-ESG law in 2023 argued, "By everyone’s admission, including the Treasurer, the [Energy Discrimination Elimination] Act is unconstitutionally vague. Accordingly, Mr. Keenan is entitled to an injunction."^[55]

Responses to counterclaims

This section lists arguments defending Oklahoma's anti-ESG law against the counterclaims.

Anti-ESG laws don't raise borrowing costs

This response argues that anti-ESG laws don't hurt states' abilities to borrow, as ESG supporters claim.

• Paul Tice, senior fellow at the National Center for Energy Analytics, argued, "Oklahoma has not seen an absolute or relative increase in municipal bond borrowing costs since the roll-out of the EDEA. To the contrary, the average YTW for Oklahoma state and local government issuers has actually tightened by 14 basis points since October 31, 2022."^[53]

Anti-ESG laws prevent politics in investments and don't harm fiduciary duties

This response argues that anti-ESG laws eliminate politics from investment decision-making, which is consistent with the fiduciary requirement to invest funds for the exclusive benefit of beneficiaries.

• Paul Tice argued that non-financial approaches exist in state investments and that Oklahoma's anti-ESG law would eliminate, not introduce, political investment considerations. He said, "Here, the anti-EDEA side is turning the legitimate criticism of ESG—that it is progressive politics masquerading as financial risk management and investment policy—on its head by arguing that the anti-ESG is the real political threat to free markets, fiduciary duty and pecuniary interest, which is quite rich."^[53]

The costs of switching asset managers don't violate fiduciary duties

This response argues that administrative costs incurred to avoid asset managers on state-restricted financial institution lists are relatively low and don't substantively reduce financial performance for public portfolios.

• Paul Tice argued, "$10 million of incremental (and importantly, one-time) administrative costs spread out over an OPERS portfolio with a market value of $11.7 billion as of June 30, 2023, equates to only 8 basis points, which is a rounding error in terms of net investment performance. ... For proper perspective, the OPERS pension fund posted a total return of -14.5% during fiscal year 2022, losing $1.8 billion of market value when the U.S. debt and equity markets both traded down sharply in the wake of the shift in monetary policy by the Federal Reserve. Market beta is the main risk to OPERS portfolio performance and pension plan beneficiaries, not the drag from investment management fees (whether recurring or not)."^[53]

Anti-ESG laws don't infringe on freedom of speech

This response argues that anti-ESG laws don't compel speech and are strictly designed to protect the state's economic and financial interests.^[53]

The debate over the Texas Permanent School Fund's divestment from BlackRock

The Texas Permanent School Fund’s decision to divest from BlackRock has sparked a contentious debate centered around ESG policies and their impact on state economies. Texas State Board of Education Chairman Aaron Kinsey defends the move, asserting that BlackRock’s emphasis on decarbonization and ESG policies, particularly its pressure on fossil fuel companies, contradicts the state's economic interests, especially in oil and gas, which are crucial to funding the Permanent School Fund. Kinsey argues that BlackRock’s actions undermine the fund’s fiduciary responsibilities to maximize returns for Texas schools.

Opponents, including BlackRock, counter that the firm’s investment practices are in compliance with Texas law, emphasizing that it continues to invest heavily in the energy sector and has provided significant returns for the fund. BlackRock claims the decision is politically motivated and risks harming long-term financial stability for Texas schools.

This section presents arguments from both sides of the debate, highlighting the broader national conflict surrounding ESG policies and their influence on public policy.

Claims

This section outlines the arguments made by Aaron Kinsey, Chairman of the Texas State Board of Education, to justify the Texas Permanent School Fund's decision to terminate its investment relationship with BlackRock.

BlackRock’s ESG policies effectively boycott fossil fuel companies

This argument asserts that BlackRock’s ESG policies, including decarbonization initiatives, pressure companies to transition away from fossil fuels. Under Texas Senate Bill 13, such practices are interpreted as a boycott.^[57]

• Aaron Kinsey, Chairman of the Texas State Board of Education, stated, "BlackRock’s dominant and persistent leadership in the ESG movement immeasurably damages our state’s oil & gas economy and the very companies that generate revenues for our PSF."^[57]
• Kinsey continued that "BlackRock’s destructive approach toward the energy companies that this state and our world depend on is incompatible with our fiduciary duty to Texans."^[57]

Boycotts make asset management companies ineligible for state contracts under TX SB 13

This claim states that Texas Senate Bill 13 prohibits state agencies from contracting with firms engaged in fossil fuel boycotts, forming the legal basis for the Texas Permanent School Fund's divestment from BlackRock.

• Kinsey explained, "The PSF’s relationship with BlackRock was not in compliance with Texas Government Code Section 809, commonly referred to as Senate Bill 13, which prohibits state investment in companies like BlackRock that boycott energy companies."^[57]

• Kinsey remarked, "The PSF will not stand idle as our financial future is attacked by Wall Street. This bold action helps ensure our PSF remains in fact permanent and will continue to support bright futures and opportunities for generations of Texas students."^[57]

BlackRock’s decarbonization initiatives and proxy voting patterns actively harm the Texas oil and gas industry and school funding

This claim argues that BlackRock’s voting and engagement practices support policies and disclosures that reduce fossil fuel demand, potentially harming the Texas oil and gas industry, a significant revenue source for public school funding.

• Kinsey emphasized, "The Texas Permanent School Fund (PSF) has a fiduciary duty to protect Texas schools by safeguarding and growing the approximately $1 billion in annual oil and gas royalties managed by the Texas General Land Office."^[57]

Using BlackRock’s services undermines fiduciary responsibility

This claim argues that BlackRock’s policies conflict with its fiduciary duty to maximize financial returns for Texas schools, particularly given the state’s economic reliance on oil and gas revenues.

• Kinsey declared, "BlackRock’s approach toward the energy companies that this state and our world depend on is incompatible with our fiduciary duty to Texans. Today represents a major step forward for the Texas PSF and our state as a whole."^[57]

• Will Hild, Executive Director for Consumers' Research, stated that "Under Larry Fink's leadership, BlackRock has been misusing client funds to push a political agenda for years. Nowhere was that more egregious than in Texas, where BlackRock was simultaneously trying to destroy the domestic oil and gas industry while managing funds that depended on royalties derived from that very same industry. A more flagrant violation of fiduciary duty is difficult to imagine."^[58]

The Texas PSF divestment was necessary to oppose ESG ideology

This claim highlights the broader implications of the Texas PSF’s decision, framing it as a stance against ESG ideology and its perceived impact on industries critical to state economies.

• Hild argued, "By divesting $8 billion from BlackRock, Chairman Kinsey and the Permanent School Fund are not only fulfilling their role as fiduciaries to one of the largest education funds in the country but sending a clear message to Wall Street elites that people can no longer be bullied into complying with ESG's destructive ideology."^[58]

Counterclaims

This section lists counterarguments presented by Mark McCombe, the vice chair of BlackRock, regarding the divestment decision by the Texas State Board of Education.

BlackRock does not boycott fossil fuels

This counterclaim asserts that BlackRock does not discriminate against fossil fuels, highlighting its energy investments.

• Mark McCombe argued, "The notion that we discriminate against oil and gas is simply false based on the investments we make on behalf of our clients. BlackRock holds more than $320 billion in global energy investments, including approximately $120 billion in Texas-based, publicly traded energy companies."^[59]

BlackRock complied with Texas law

This counterclaim asserts that BlackRock fully complies with Senate Bill 13 because its investments do not meet the legal definition of a boycott under the law.

• McCombe stated, "We fully comply with Texas law and fundamentally disagree with your assessment based on BlackRock’s performance for Texas PSF and our investments in Texas energy companies."^[59]

BlackRock delivered financial benefits to the TPSF

This counterclaim emphasizes that BlackRock has provided significant long-term financial benefits, generating over $250 million in excess returns for the Texas PSF during an 18-year relationship, while maintaining competitive fees.

• McCombe argued, "BlackRock has been a trusted partner to Texas PSF in fulfilling this duty for nearly two decades - delivering consistently strong performance for Texas PSF over that time. Our international mandate outperformed Texas PSF’s own benchmark since our partnership began in 2006 – generating in excess of $250 million for Texas PSF – with competitive fees. Fiduciaries should prioritize performance and fees when executing their duty."^[59]

Texas law included a fiduciary exception that applied to BlackRock's contract

This counterclaim asserts that even if compliance were questioned, Senate Bill 13 explicitly allows state entities to avoid divestment when it conflicts with fiduciary duties. The counterclaim argues that BlackRock’s outperformance aligns with these fiduciary obligations.

• McCombe stated, "Additionally, Senate Bill 13 makes clear divestment is not required when a government entity determines divestment is inconsistent with its fiduciary responsibilities. The outperformance BlackRock has demonstrated shows divestment would not be in the best interest of Texas PSF."^[59]

The decision to terminate BlackRock's contract violated TPSF’s fiduciary duty

This counterclaim argues that terminating the partnership undermines the financial future of Texas schools, jeopardizing a reliable and productive relationship for political reasons.

• McCombe stated, "The welfare of all Texans remains our shared priority. We are fiduciaries with a mandate to maximize performance for the people that entrust us to manage their money. That has been our guiding principle since our founding in 1988. We are asking for a reevaluation of your decision in order to preserve the productive and mutually advantageous relationship between Texas PSF, our company, and the Texans we serve."^[59]

The decision to terminate was politically driven and lacked transparency

This counterclaim asserts that the decision-making process lacked transparency and that not all board members were adequately informed. It further argues that the termination was politically motivated, prioritizing short-term politics over long-term financial interests.

• McCombe claimed, "We’ve come to learn that not all Texas PSF board members were made aware of your decision before it was announced and did not have an opportunity to ask questions or share views. How our clients invest and whom they entrust to manage their money is entirely their decision, but we feel an action of this magnitude warrants transparency and consensus – not political-driven decision making. Texas schools and families deserve that."^[59]

Responses to counterclaims

This section lists responses to BlackRock's counterarguments presented by The State Financial Officers Foundation (SFOF).

BlackRock’s energy investments are insufficient to disprove a boycott

This response argues that the mere existence of BlackRock’s $320 billion in energy investments, including $120 billion in Texas-based companies, does not negate claims of a boycott. It highlights that BlackRock’s energy portfolio is disproportionately allocated toward renewable energy and decarbonization projects, rather than traditional oil and gas, which undermines the fossil fuel industry.

• The State Financial Officers Foundation's (SFOF) response to BlackRock's claims arguing that "BlackRock, the world’s largest asset manager, has taken significant steps to promote decarbonization, claiming that “climate risk is investment risk.” In its 2030 net zero statement, BlackRock outlines its vision for our future—by 2030, all issuers should develop and implement 2 robust transition plans."^[60]

BlackRock’s ESG policies and proxy voting practices actively harm fossil fuels

This response argues that BlackRock’s ESG policies and proxy voting practices go beyond simple investment decisions and directly undermine fossil fuel companies. It emphasizes that BlackRock pressures companies to transition away from oil and gas through corporate governance advocacy and shareholder votes, which qualifies as a boycott under Texas Senate Bill 13.

• The State Financial Officers Foundation report continued, "Furthermore, advocating reductions in fossil fuel production would, if effective, inflict economic harm on the companies. Taking actions to discourage consumption of those fossil fuels hurts that industry. Finally, pressure to decrease the use of energy coming from fossil fuels, if effective, would limit commercial relations with such companies."^[60]

BlackRock’s fiduciary exemption claim does not justify continued investment

This response argues that BlackRock’s reliance on the fiduciary exemption in Senate Bill 13 is invalid because its ESG priorities conflict with the PSF’s long-term obligation to maximize revenues for Texas schools. It claims that BlackRock’s practices, by undermining the oil and gas industry, threaten a critical revenue source for the PSF, thereby failing to align with fiduciary duties.

BlackRock’s financial performance does not outweigh the harm it causes to Texas interests

This response argues that while BlackRock claims $250 million in excess returns for the PSF over 18 years, this short-term financial performance is outweighed by the long-term harm to Texas schools caused by BlackRock’s policies. It asserts that undermining oil and gas revenues—an essential funding source for the PSF—represents a far greater threat to Texas schools than the benefits of any temporary outperformance.

• State Financial Officers Foundation argued, "However, having a large amount of investment in the energy sector does not demonstrate a lack of boycotting of oil and gas. BlackRock is a very large private asset manager, the largest in the world—whatever it holds, it will tend to hold quite a lot of. But with assets of roughly ten trillion dollars, it is not clear that 320 billion represents a proportionate share compared to the rest of the industry. In addition, investing in the energy sector is not the same as investing in oil and gas."^[60]

The TPSF’s decision aligns with fiduciary responsibility

This response argues that divesting from BlackRock is consistent with the PSF’s fiduciary duty because it prioritizes protecting long-term revenues from oil and gas royalties, which fund Texas schools, over BlackRock’s short-term investment performance.

• SFOF asserts, "How exactly does PSF's action violate its fiduciary duty? In other contexts, BlackRock's allies have argued that firing BlackRock violates fiduciary duty because of the transition costs of selling the investment. But that occurs whenever a portfolio switches from one investment to another. If it’s non-fiduciary to incur any transition costs, then it’s non-fiduciary almost ever to change investment portfolios. Sometimes it has been suggested that firing BlackRock violates fiduciary responsibility because of BlackRock's low fees. However, there are other large firms with comparably low fees and new entrants willing to match or beat BlackRock's cost of managing money."^[60]

The debate over California's climate disclosure requirements

California Governor Gavin Newsom (D) signed California Senate Bills 253 and 261 into law on October 7, 2023. These bills, titled the Climate Corporate Data Accountability Act (CCDAA) and Climate-Related Financial Risk Act (CRFRA), respectively, require business entities conducting business within California with total revenues above $1 billion to report greenhouse gas emissions and climate-related financial risks annually. The CCDAA requires businesses to report Scope 1, Scope 2, and Scope 3 emissions, which include indirect upstream and downstream greenhouse gas emissions such as those generated through purchased goods and services, business travel, employee commutes, and consumer use of sold products. Newsom said the climate disclosure laws demonstrated a bold response to climate change and that they turned information transparency into climate action. He pushed the implementation date of the legislation due to concerns about feasibility and expressed concern about inconsistent reporting according to the protocol specified in the bill and the financial impacts of the bill.^{[61][62][63][64]}

The U.S. Chamber of Commerce, among other plaintiffs, sued the California Air Resources Board on January 30, 2024, over the climate disclosure laws. The lawsuit alleged that they violated the First Amendment, the Supremacy Clause, and the United States Constitution’s limitations on extraterritorial regulation. A judge denied the plaintiff's motion for summary judgment on November 5, 2024.^[65]

This section presents arguments from both sides of the debate, highlighting the broader national conflict surrounding ESG policies and their influence on business.

Claims

Claims in this section argue in favor of California's climate disclosure laws.

Requiring companies to disclose greenhouse gas (GHG) emissions (including Scope 3) and climate risks ensures greater transparency for investors, consumers, and stakeholders

This claim argues that climate change poses financial risks and is relevant to investors when considering which companies to invest in.

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "In passing Senate Bills 253 and 261, the Legislature noted that the current reporting initiatives 'lack the full transparency and consistency' needed by California residents, consumers, and investors to fully understand climate risks ... The Legislature sought to resolve the problem of inconsistent reporting among companies doing business in the State by crafting laws that comprehensively serve to 'inform investors, empower consumers, and activate companies to improve risk management in order to move towards a net-zero carbon economy,' ... and 'set mandatory and comprehensive risk disclosure requirements for public and private entities to ensure a sustainable, resilient, and prosperous future'."^[66]

Climate disclosures empower stakeholders to make informed decisions and hold companies accountable for their environmental impact

This claim argues that climate disclosure laws allow citizens to allocate their money according to their values.

• Clara Vondrich, senior policy council with Public Citizen’s Climate Program, reacted to the passage of California climate disclosure laws saying: "This legislation will let the public and regulators track companies’ decarbonization progress and hold them accountable to their climate promises. And it will let investors safeguard their savings against climate-related risks and invest in ways that align with their values."^[67]

Disclosure requirements help identify vulnerabilities and enable better risk management

This claim argues that climate disclosure laws help companies assess and mitigate climate risks to maintain and improve financial performance.

• Contributing authors Mike Eardley, Tara Copas, and Kyle Sullivan argued in Corporate Compliance Insights: "Climate risks can significantly impact financial performance and long-term viability. Incorporating climate-related disclosures into broader risk management frameworks enables companies to better identify, assess, and mitigate these risks. This proactive approach strengthens organizational resilience and prepares companies for a future where climate-related challenges are increasingly prevalent."

Climate-related risk reports help ensure businesses are prepared for climate-related disruptions

This claim argues that climate disclosure laws help companies prepare for what it calls an increasingly uncertain future as it pertains to climate risks.

• Contributing authors Mike Eardley, Tara Copas, and Kyle Sullivan argued in Corporate Compliance Insights: "Notwithstanding the challenges facing the SEC’s climate disclosure rule, the strategic integration of climate disclosure programs into risk management is essential for businesses navigating an increasingly uncertain future, particularly as insurers tighten their requirements for coverage."^[68]

The policies set a positive precedent for national and global climate governance, encouraging other jurisdictions to follow suit

This claim argues that California's climate disclosure laws set the stage for the U.S. Securities and Exchange Commission (SEC) to implement national reporting regulations, since California's disclosure laws apply to a vast number of American businesses and implementation costs for the SEC regulations would be low.

• Climate policy researcher Sadie Frank argued: "Overall, the California laws mean that a substantial amount of American firms are now likely subject to a strong climate disclosure rule. Practically speaking, the compliance costs of the SEC rule have now plummeted, since any costs for companies to produce emissions inventories or physical risk assessments will already be incurred under California’s laws for covered firms. For firms that need to disclose their risks in annual reports and elsewhere under the SEC rule, compliance will now mean looking up and reporting back information that has already been collected. And while the SEC has faced substantial pushback regarding the inclusion of Scope 3 emissions disclosure, which opponents argue is costly to collect, SB 253’s Scope 3 mandate means that as the rule is implemented, data quality will likely go up, while data costs go down. In other words, the California laws have now cleared the path for the SEC to pass its own rule with reduced costs for both the agency and US companies."^[69]

• Law firm Vinson and Elkins wrote: "Some commentators have hypothesized that the California Climate Accountability Package may provide the SEC with some political cover to push more aggressive positions in its own final climate rules, as the California legislation would already provide significant burdens related to Scope 3 GHG emissions reporting for a large swath of publicly listed companies that would be swept under both reporting mandates given their size and California nexus."^[62]

The regulations align with increased investor demand for standardized and comprehensive climate-related data

This claim argues that climate change poses a significant financial risk for certain companies and that climate disclosure laws help investors make holistic financial decisions.

• Contributing author Sadie Frank argued in Green Central Banking: "These disclosures are increasingly important to the functioning of capital markets. As climate risks begin to drive losses across the global economy, surveys of investors consistently confirm the importance of climate risk disclosures in capital allocation and risk management. Regulators like the SEC have responded to the growing need for climate risk information with a wave of climate risk disclosure initiatives and mandates."^[70]
• EarthJustice, an environmentally focused law firm, argued: "The [SEC's climate disclosure] rule comes amid a growing consensus among financial regulators in the U.S. and around the world that climate change poses significant risks to financial systems, and that securities regulators have an important role to play in mitigating those risks in order to protect investors and the economy. Even fossil fuel companies like Exxon and Chevron have begun to selectively concede that their assets are at risk for impairment due to climate change and the energy transition, which could have major impacts on investors and markets."^[71]

Counterclaims

These claims oppose California's climate disclosure laws.

The disclosure requirements compel companies to speak on topics they may not wish to address, violating free speech rights

This claim argues that climate disclosure laws compel businesses to speak noncommercially on controversial political matters and are therefore unconstitutional under the First Amendment.^[72]

• In a lawsuit filed by the U.S. Chamber of Commerce and others against the California climate disclosure laws, the plaintiffs argued the following: "Senate Bills 253 and 261 impermissibly compel thousands of businesses to make costly, burdensome, and politically fraught statements about 'their operations, not just in California, but around the world,' ... in order to stigmatize those companies and shape their behavior. Both laws unconstitutionally compel speech in violation of the First Amendment."^[73]

Forcing companies to disclose value-chain emissions (Scope 3) imposes an excessive burden and is overly prescriptive

This claim argues that disclosure laws impose excessive costs that are particularly burdensome for small businesses.

• In a lawsuit filed by the U.S. Chamber of Commerce, among others, against the California climate disclosure laws, the plaintiffs argued: "Estimating greenhouse-gas emissions is enormously burdensome. The requirement to estimate and report Scope 3 emissions alone will cost many companies more than $1 million per year. ... The burden of estimating Scope 3 emissions flows up and down the supply chain. Small businesses nationwide will incur significant costs monitoring and reporting emissions to suppliers and customers swept within the law’s reach. For example, scores of family farm members of AFBF will need to report emissions to business partners that do business with entities covered by S.B. 253."^[73]

• Law firm Vinson and Elkins wrote: "Although Scope 3 GHG emissions often account for over 90% of an organization’s overall carbon inventory, such emissions are exceptionally challenging to measure. Companies would also be required to have their emissions data validated by an independent auditor and publicly disclose such reporting via a digital platform, which must be capable of allowing stakeholders, consumers and investors to view the data in an 'easily understandable' manner."^[62]

California's laws would regulate companies operating beyond its borders, burdening interstate commerce under the Supremacy Clause

This claim argues that because many businesses operate in multiple jurisdictions, California's climate disclosure laws regulate areas outside of California's jurisdiction, violating the Supremacy Clause of the U.S. Constitution.

• In a lawsuit filed by the U.S. Chamber of Commerce and others against the California climate disclosure laws, the plaintiffs argued the following: "Senate Bills 253 and 261 ... seek to regulate an area that is outside California’s jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and the federalism principles embodied in our federal Constitution. These laws stand in conflict with existing federal law and the Constitution’s delegation to Congress of the power to regulate interstate commerce." The plaintiffs continued: "While federal law may permit California to regulate greenhouse gas emissions within the State’s own borders, California has no right to regulate emissions in other states or in other parts of the world, let alone to do so through a novel program of speech regulation."^[73]

• Contributing authors argued the following in a post on the Harvard Law School Forum on Corporate Governance: "Once finalized, these laws will have a profound impact, extending well beyond the border of California. Any company that “does business” in California and has revenues above the relevant threshold (regardless of the geographic source of the revenues) is subject to the laws’ requirements, regardless of where its operations are located. As discussed below, “doing business” is a standard that is likely satisfied by fairly minimal interactions with California. It is estimated that S.B. 253 and S.B. 261 will cover over 5,000[3] and 10,000[4] companies, respectively, including many privately-held companies unlikely to have assessed the scope of their GHG emissions or adopted the TCFD recommendations (which are designed for public companies). They also include disclosure requirements that go beyond the far-reaching requirements of the SEC’s proposed climate-related disclosure rule or the current practices of most public companies."^[74]

Climate disclosures are inaccurate and ineffective

This claim argues that there is little evidence that estimating a company's climate impact is accurate, making disclosure requirements expensive and ineffective in reducing climate impact or increasing investor information.^[73]

The disclosure requirements hurt farmers

This claim argues that disclosure laws incur excessive costs that are particularly burdensome for small businesses.

• In a lawsuit filed by the U.S. Chamber of Commerce against the California climate disclosure laws, the American Farm Bureau Federation, an additional plaintiff, argued the following: "Nearly every farmer touches the value chain of those that will be directly regulated by the laws and thus will be caught up in those companies’ efforts to report Scope 3 emissions, incurring burdensome compliance costs, regardless of their contacts with California. Moreover, some regulated companies may favor larger farms that can more easily supply the information, to the detriment of smaller operations, leading to increased consolidation and integration."^[73]

Responses to counterclaims

This section contains arguments supporting California's climate disclosure laws against the opposing counterclaims.

The disclosure laws caused no harm under the First Amendment

This claim argues plaintiffs opposing the laws did not plead a sufficient injury under the First Amendment to justify the lawsuit's standing in federal court.

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "While Plaintiffs plead a purported injury for their First Amendment claim, they fail to plead a sufficient injury to support standing with respect to their preemption and extraterritoriality challenges."^[75]

Many companies already track emissions and risks voluntarily, so the laws are not overly burdensome

This claim argues that since many companies already report emissions and climate risks under other climate disclosure programs, such as the European Union’s Corporate Sustainability Reporting Directive, California's climate disclosure laws would not be overly burdensome.

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "Both climate-related disclosure bills were enacted against the backdrop of other reporting frameworks under which many of Plaintiffs’ member companies already operate. ... The Legislature sought to resolve the problem of inconsistent reporting among companies doing business in the State by crafting laws that comprehensively serve to 'inform investors, empower consumers, and activate companies to improve risk management in order to move towards a net-zero carbon economy,' 2023 Cal. Stats., ch. 382 § 1, and 'set mandatory and comprehensive risk disclosure requirements for public and private entities to ensure a sustainable, resilient, and prosperous future.' 2023 Cal. Stats., ch. 383 § 1."^[75]

The disclosure laws do not burden interstate commerce in violation of the Supremacy Clause

This claim argues that no federal laws preempt state climate impact disclosure laws, including the Clean Air Act, which preserves state authority over air pollution. It includes claims arguing that California's law doesn't regulate the environment and instead only creates an informational reporting requirement.

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "Moreover, Plaintiffs have not stated a claim under the Supremacy Clause, as they failed to identify any federal law that preempts these state disclosure laws. The only law they do identify—the Clean Air Act—is inapplicable to these reporting frameworks, and in any event, preserves state authority in the field of air pollution."^[75]

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "The Plaintiffs’ second claim rests on an incorrect premise: that these statutes 'regulate greenhouse-gas emissions outside of [California’s] own borders.' These statutes require informational disclosures; they are not laws regulating the emissions themselves. Plaintiffs admit that 'the laws do not directly require reductions in greenhouse-gas emissions.' In fact, the entire basis of the Plaintiffs’ First Amendment claim is that these statutes regulate speech, not emissions."^[75]

The disclosure laws are effective in filling an information gap for investors and consumers about climate risks

This claim argues that California's climate disclosure laws filled a gap in climate governance, giving investors the information about climate risk they need to make investment decisions.

• In a motion to dismiss a lawsuit challenging California Senate Bills 253 and 261, the defendants argued: "In passing Senate Bills 253 and 261, the Legislature noted that the current reporting initiatives 'lack the full transparency and consistency' needed by California residents, consumers, and investors to fully understand climate risks ... The Legislature sought to resolve the problem of inconsistent reporting among companies doing business in the State by crafting laws that comprehensively serve to 'inform investors, empower consumers, and activate companies to improve risk management in order to move towards a net-zero carbon economy,' ... and 'set mandatory and comprehensive risk disclosure requirements for public and private entities to ensure a sustainable, resilient, and prosperous future.'"^[75]

The debate over NYC's fossil fuel divestment

The New York City Teachers’ Retirement System, the New York City Employees’ Retirement System, and the New York City Board of Education Retirement System divested from publicly traded fossil fuel reserve owners.^[76] The decision aligned with New York City's commitment to "divest major pension funds from fossil fuels by 2022, increase investments to $8 billion in climate change solutions – such as renewable energy, energy efficiency, and green real estate – by 2025, further ramp up investments in climate solutions to $50 billion by 2035, and achieve net-zero portfolio emissions by 2040."^[77]

Four public employees filed a lawsuit (Wong et al v. NYCERS) in May 2023, challenging the divestment decision. They claimed the pension plans divested from fossil fuel stocks without doing a proper financial analysis, that climate change is unrelated to financial considerations, and that fossil fuels are a financially profitable investment.^[78] The motion was dismissed because the four plaintiffs were determined by the court not to have suffered any injury as a result of the divestment.^[76]

Claims

This section lists claims supporting the divestment of New York City's pension funds from fossil fuel investments.

Divesting from fossil fuels mitigates material financial risks

This claim argues that the use of fossil fuels poses a financial risk, and companies that transition to other energy sources are better positioned for success.

• NYC Comptroller Brad Lander stated, “Our pension funds are implementing ambitious and well-researched plans to address the material risks of climate change — including divesting from fossil fuels, investing in renewable energy and climate solutions, and actively engaging with our asset managers and portfolio companies to reduce their financed emissions."^[76]

Investing in fossil fuels would threaten the pension board's fiduciary duty

This claim argues that fossil fuels have not performed well in the stock market and that investing in such stocks would threaten the pension board's fiduciary duty.

• The Mayor's Office of Climate & Environmental Justice wrote, "By committing to remove fossil fuel assets from investment portfolios and increasing assets in sustainable companies and projects, NYC recognizes the dangerous business models of fossil fuel companies. They not only emit planet-warming and health-harming pollution, but also have experienced lagging stock market performance and weak outlooks, putting pension fund trustees at risk of breaching their fiduciary duty."^[77]

Divesting from fossil fuels is good for the environment

This claim argues that divesting from companies that are responsible for large greenhouse gas emissions can have a positive impact on climate change.

• Queens Borough President Donovan Richards Jr. said, “From the destruction inflicted on our coastal communities during Superstorm Sandy to the unprecedented flooding of our inland neighborhoods during Hurricane Ida, no borough has felt the severe sting of climate change like Queens. By successfully divesting billions of dollars from fossil fuel-related securities that directly contribute to a warming planet, New York City is once again claiming its place at the forefront of the global green revolution. Divesting from fossil fuel is itself a direct investment in the future health and well-being of our families, ensuring our children have a fighting chance against the perils of climate change.”^[79]

Investing in clean energy expedites the implementation of climate solutions

This claim argues that investing in clean energy and divesting from fossil fuels makes the implementation of climate solutions possible.

• The Mayor's Office of Climate & Environmental Justice wrote, "In March 2021, the City announced that it had invested $6 billion in climate solutions, surpassing its initial goal nearly a year ahead of schedule. If all U.S. pensions sustainably invested the same percentage of assets as NYC, half of the homes in the country could be solarized."^[77]
• NYC Comptroller Scott M. Stringer stated, “Today is a major victory for our planet, our children, and our pensioners. The successful divestment of $3 billion out of fossil fuels is proof-positive that environmental and fiscal responsibility go hand in hand. New York City is leading the way toward a clean, green and sustainable economy, and the impacts of the actions we are announcing today will be felt for generations to come."^[79]

Counterclaims

This section lists counterclaims opposing the divestment of New York City's pension funds from fossil fuel investments.

Divestment prioritizes ideological goals over fiduciary duty

This claim argues that divestment from fossil fuel companies prioritizes ideological goals and deprioritizes financial returns for pension fund beneficiaries.

• In the decision and order on motion for Wong et al v. NYCERS, "Plaintiffs assert that they have a stake in the outcome of this litigation because defendants’ investment decisions have had 'a detrimental impact on the financial health' of their retirement plans and on their plans’ 'ability to pay the pension benefits they owe.'"^[80]

Underfunding of the pension plan would be detrimental to New York's taxpayers

This counterclaim argues that if the pension plans didn't have enough money to pay all the beneficiaries due to mismanaged portfolios, New York's taxpayers would have to make up the difference.^[80]

• In the motion to dismiss for Wong et al v. NYCERS, "The four individual Plaintiffs do not claim that the Plans have denied them any benefits. Nor do they allege that the Plans will be unable to pay their benefits when they ultimately retire (which they allege will happen between 2027 and 2048, respectively). Rather, they correctly acknowledge that any shortfall between the Plans’ assets and the benefits ultimately owed must be covered by contributions from the government."^[75]

The plans divested without first doing a proper financial analysis

This counterclaim argues that the plans did not do a proper financial analysis before divesting from fossil fuel stocks and mismanaged their funds.^[78]

Over the last decade, fossil fuel stocks overall did not perform worse than the market as a whole

This counterclaim argues that fossil fuel stocks did not perform worse than the market as a whole and are therefore a viable investment.

• In the motion to dismiss for Wong et al v. NYCERS, "Plaintiffs allege that fossil-fuel stocks have delivered 'exceptional returns' for shareholders and outperformed the broader market 'by orders of magnitude' in 2022. In particular, Plaintiffs allege that, in 2022, the S&P 500 Energy Sector index 'rose 58 percent, and was the only segment of the S&P 500 index that did not experience a loss for the year.'"^[75]

Responses to counterclaims

This section lists arguments defending New York City's pension funds' divestment against the counterclaims.

Pension fund beneficiaries have not and will not suffer injury due to divestment

This response argues that the beneficiaries of the pension funds will not suffer injury due to divestment, regardless of whether or not divesting from fossil fuels is a sound investing strategy.

• In the decision and order on motion for Wong et al v. NYCERS, "The Court reasoned that the plaintiffs did not suffer such an injury because their retirement plan was a 'defined benefit plan,' entitling them to receive a 'fixed payment each month' that does 'not fluctuate with the value of the plan or because of the plan fiduciaries’ good or bad investment decisions.' Therefore, the outcome of the 'suit would not affect their future benefit payments' and the plaintiffs had 'no concrete stake' in the lawsuit."^[80]
• In the decision and order on motion for Wong et al v. NYCERS, "Finally, plaintiffs argue that they have standing to bring this action as citizen taxpayers pursuant to General Municipal Law § 51. They do not, however, indicate in their complaint that they are suing under General Municipal Law § 51. In addition, absent fraud, 'or a waste of public property in the sense that [it] represent[s] a use of public property or funds for entirely illegal purposes,' which is not alleged in the complaint, a taxpayer suit does not lie under General Municipal Law § 51."^[80]

Addressing climate change is not a political choice but an economic imperative

This response argues that addressing climate change risks isn't a political choice, but rather economically necessary.

• New York City Comptroller Brad Lander argued, “The Systems are implementing ambitious and well-researched plans to address the responsibility that investment managers and portfolio companies have to assess the material risks of climate change. Rather than advancing the actual interests of our City’s public employees and retirees, the lawsuit seeks to protect companies that continue to focus on fossil fuels despite the ongoing and necessary transition to a low carbon economy. The courts should call this lawsuit what it is and dismiss it with prejudice.”^[78]

Fossil fuel investments pose long-term financial risks due to the risks of climate change

This response argues that companies reliant on fossil fuels face long-term financial risks from climate change.

• New York City Mayor Eric Adams stated, “At a time when the impacts of climate change are intensifying, this lawsuit would take our city in the wrong direction. The decisions to divest from fossil fuels were based on determinations that these investments presented too much risk for too little reward. We believe this lawsuit is meritless, and the plaintiffs have even admitted that divestment has not affected their retirement benefits.”^[78]

The divestment decision was well-researched and a financially sound decision

This response argues that the divestment decision was made based on research and data that supports the idea that fossil fuel divestment is economically beneficial.

• The NYC Comptroller responded in a press release that, "Throughout the lawsuit, the plaintiffs attempt to make three meritless arguments against divestment. They falsely claim that the Plans divested without financial analysis. They pretend that climate-related risks are wholly “unrelated” to financial considerations. And they ignore that, over the last decade, fossil-fuel stocks performed substantially worse than the market as a whole."^[78]