Opinion: Why Gov. Cox should consider the case for ESG

Florida Gov. Ron DeSantis is determined to fight against the ESG (environmental, social and governance) movement taking place in the world. He labels anything having to do with ESG as a financial scam that is perpetuated on the American public by a “radical” “woke mob.” In his latest maneuver, DeSantis has introduced legislation that, among other things, prohibits the use of ESG factors in all investment decisions at the state and local level, ensuring that managers only consider financial factors that maximize the highest rate of return.

On its face, this legislation might seem perfectly reasonable. Financial fiduciaries have a responsibility to their clients and should not make investment decisions that could harm their clients’ financial returns. However, perhaps DeSantis is unaware of the slew of academic studies showing a positive relation between ESG activity and financial outcomes. Or, perhaps more likely, he is aware of the evidence but chooses to ignore it for further political gain.

Gov. Spencer Cox has joined an alliance of 19 conservative governors (led by DeSantis) who pledge to push back against Biden’s rule that allows financial fiduciaries to consider ESG factors. Cox proudly proclaims on his Twitter account that the legislation would benefit “many Americans.” However, he has not elaborated on how Americans will be benefitted.

Based on Cox’s actions so far as governor, including his bold and aggressive steps to save the Great Salt Lake to better our environment in Utah, I believe the governor is concerned about ESG issues and that he believes in science. Accordingly, he should be made aware of the plethora of studies that show a direct relation between ESG activity and financial outcomes. For example, a 2017 paper in the most prestigious finance journal, the Journal of Finance, shows that companies with high ESG scores had higher stock returns than other companies during the 2008-2009 financial crisis, consistent with the theory that the trust between firms and investors, built through responsible ESG activity, pays off when the market suffers a negative shock.

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Other theories suggest that firms with positive ESG investment protect themselves from future litigation, which clearly has financial implications. A study out of the National Bureau of Economic Research shows that companies with higher ESG rankings receive more lenient settlements from prosecutors and have higher resulting market valuations. In fact, one could easily argue that these firms are naturally able to avoid litigation all together, which is also supported by research.

I could go on quoting academic studies on the effects of ESG reporting; the literature is vast and spans several decades. Given the large volume of studies on the topic, unsurprisingly, not all the evidence is consistent. However, the preponderance of the evidence leans heavily in favor of the notion that responsible ESG activity by corporations leads to positive financial outcomes, which in turn, leads to better investment returns for shareholders.

This isn’t just a woke political ideology; it’s borne out by science. Why then would Cox want to outright ban any consideration of ESG factors from financial decisions? Notably, Biden’s rule to allow retirement fiduciaries to consider ESG factors does not require them to do so; whereas, DeSantis’s legislation would take that freedom away from financial managers.

I hope Cox will review the evidence on this issue and if he still believes the legislation proposed by DeSantis is warranted, that he will clearly explain his reasoning to his constituents.

Lynn Rees, Ph.D., is a professor at Utah State University. His views are his own.