With the creation of a new ESG Oversight Committee, Arkansas has made a substantial shift in the state’s changing investment and sustainability landscape. The committee was fully formed last month when Governor Sarah Huckabee Sanders appointed Tom Lundstrom as the committee’s fifth and final member. This committee is charged with identifying financial service providers who are thought to discriminate against certain traditional value industries (fossil fuels, ammunition, etc.) based on ESG-related considerations under last year’s House Bill 1307, which is now Act 411.
The committee’s judgments will have a significant impact on Arkansas’s investment climate and economy as it advances, with noteworthy deadlines for delivering its preliminary and final lists of these financial providers. The recently released report, “The Potential Economic and Tax Revenue Impact of Texas’ Fair Access Laws”, conducted by the Texas Association of Business Chambers of Commerce Fund (TABCCF), is an important source the Arkansas committee should review in order to understand the possible harm that comparable anti-ESG legislation has caused states who have chosen to inject politics into their decision making.
According to the TABCCF study, during 2022-2023, the Texas anti-ESG legislation resulted in an estimated:
The study asserts: “These findings illustrate that when government attempts to mandate values, no matter what kind to businesses, the market loses.”
The report is built on earlier work included in a 2023 study titled “Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies,” by Drs. Ivan Ivanov of the Federal Reserve Bank of Chicago and Dan Garrett of the University of Pennsylvania. The study looked at certain organizations that were thought to be boycotting due to their affiliations or fiduciary decisions that have been expelled or removed from the municipal bond market.
Their resulting analysis: this legislation did, in fact, limit competition in the public finance sector, raising interest rates by 0.144 percent.
Thanks to its pro-business environment, Texas now has the eighth-largest economy in the world. Less competition in the municipal bond market, however, is driving up interest rates, which puts more strain on local governments’ finances and adds to the costs borne by Texas taxpayers.
If that wasn’t enough, the underlying political effects of these politically driven policies continue to rear their head. Just this week, Aaron Kinsey, the Chair of the Texas State Board of Education (SBOE) announced the Texas Permanent School Fund Corporation divest approximately $8.5 billion of assets BlackRock currently manages for them – a move that will undoubtedly further increase costs while reducing returns for Texas schools.
This action, which allegedly came without a formal board vote, quickly upset Kinsey’s fellow SBOE board members. “We just can’t divest from them overnight. They’re very good moneymakers for us,” Republican SBOE board member Pat Hardy said of BlackRock, concluding, “They’ve been really good. They’ve been one of our main investment people for, gosh, 15 years.”
Given this context, Arkansas is presented with a cautionary tale that highlights the necessity for thoughtful assessment to prevent deterring business investments in the state and jeopardizing fund performance for political theater.
The position taken on this matter by the Arkansas Teachers Retirement System (ATRS) highlights the financial implications and practical difficulties associated with enacting a narrow boycott list. ATRS has emphasized that three BlackRock-managed funds, which have over $1.2 billion invested in them, do not exhibit bias against the energy, fossil fuel, weapons, or ammunition businesses. This disclosure is crucial because it demonstrates the system’s all-encompassing approach to guarantee that its investment managers respect Arkansas’s ESG standards while also being in line with the members’ financial interests.
Given the possibility of major financial ramifications, the Arkansas ESG Oversight Committee’s next judgments should be approached with prudence. The ATRS warning highlights the conflict between political goals and practical economic considerations on the potential costs of divesting from financial services companies—should they end up on the boycott list. Divestment of this kind might cost retired teachers in Arkansas alone at least $6 million.
The larger lesson is evident as Arkansas proceeds: establishing an ESG-related boycott list in a transition economy has complicated ramifications for retirees and private investors alike, in addition to the state’s budget and broader economy. The combination of ATRS’s proactive actions and Texas’ experience serves as a crucial reminder of the necessity for a nuanced, balanced approach that protects the interests of all parties involved. It will take careful thought and, most importantly, a clear understanding of the lessons gained from other jurisdictions to ensure that Arkansas maintains its inviting status for businesses.
