Article Image

IPFS News Link • Government

Governments, Not Markets, Impel ESG

• By Allen Mendenhall and Daniel Sutter

Our new paper in the Santa Clara Journal of International Law examines whether market forces or government interventions drive ESG's rise.  We conclude that government policies, rather than investor preferences, primarily fuel ESG.

Governments worldwide have imposed numerous ESG-related regulations, with many more in progress or under consideration.  In fact, governments activate the surge in ESG as forward-looking investors aim to divest from soon-to-be penalized sectors such as oil, natural gas, or firearms.

In a level playing field, ESG-weighted portfolios struggle against market-tracking index funds, which provide better diversification and risk reduction. Government regulations mandating climate-related disclosures benefit ESG funds by reducing investor options, making securities in ESG portfolios more attractive than they would be under (more) perfect competition.

Whether market pull or government push drives ESG also affects interpretation of the emergent "anti-ESG" movement.  Are the several states limiting or banning investment of state dollars, including public pensions, in ESG restricting investor freedom, or protecting investors from predation by other governments?

We document the diverse government measures pushing ESG integration within financial markets.  Governments are unleashing an entire policy arsenal, including mandates, regulations, taxes, and subsidies.

Government emissions reduction commitments under the Paris climate treaty drive the renewable energy transition in the European Union, Australia, and the United States.  The European Union and the US offer various tax credits and grants for clean-energy projects and energy-efficient improvements.

The Biden Administration is subsidizing wind, solar, electric vehicles, and charging stations and imposing more stringent emissions standards for new vehicles and power plants. An executive order from President Biden led to ESG actions by the Financial Stability Oversight Council, the Securities and Exchange Commission, and the Department of Labor.

Additionally, most states have renewable portfolio standards requiring utilities to obtain a substantial portion of their electricity from renewable sources like wind and solar, with some states targeting 100 percent renewable generation.