Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
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Glenn Hegar
Texas Comptroller of Public Accounts
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A Review of the Texas Economy


The ABCs of ESG Investing Non-Financial Measures, Big Financial Implications

By Moise Julot Published May 2023

ESG investing, or environmental, social and governance investing, is an investment practice in which investors use non-financial factors in an attempt to identify investment risks and growth opportunities. Stakeholders including employees, customers, asset owners and regulators are paying close attention to the practice. In the purest form, the ESG movement aims to create greater awareness and accountability among companies and their owners about the firms’ potential negative effect on third parties, such as the impact of the firms’ production and consumption practices on the atmosphere, oceans and biodiversity. Such awareness, advocates suggest, will create greater incentives for firms to recognize adverse effects and develop better business practices and behaviors. Advocates include signatories to groups such as Principles for Responsible Investment, Climate Action 100+ and The Net Zero Asset Managers initiative. In other forms, ESG is used as a tool to push environmental and social agendas, or in some situations simply used as a marketing tool.

The ESG concept is a form of “stakeholder capitalism,” an idea that businesses should embrace responsibilities beyond maximizing shareholder returns and take a stand on societal challenges, such as climate change and social justice issues. While the framework for targeted investment strategies was laid earlier, stakeholder capitalism originated in the 1950s and 1960s and aimed to focus on all constituents rather than shareholder interests. ESG measures claim to attempt to put a price on the risks associated with a company’s effect on such things as the environment.


Looks at a company’s environmental impact such as carbon emissions, pollution and waste, and potential climate change impacts. The environmental aspect of ESG has commanded much of the attention in recent years partially due to national and global climate goals, such as efforts to reduce greenhouse gas emissions, reach carbon-free electricity and achieve a net-zero emissions economy. Recent dialogue has called into question the transparency and efficacy of such goals and pledges.


Considers a company’s relationship with internal and external stakeholders such as a company’s relationship with its workforce, suppliers, contractors and the communities in which it operates.


Looks at corporate governance and corporate behaviors such as the diversity of a company’s board, executive compensation and accounting practices.

Source: CFA Institute


Investment strategies that align with ethical and social considerations are not new. ESG investing represents the latest iteration.

The early motives for ESG investing were moral or ethical, based on third-party effects rather than investment returns. Socially Responsible Investing (SRI), the framework from which ESG investing evolved, began in the 1920s and entailed screening investments to exclude businesses that conflict with the investor’s values. The first SRI fund, launched in 1928, restricted investing based on social issues such as tobacco, alcohol and gambling. ESG investing gained renewed interest in the mid-2000s, after then-United Nations Secretary-General Kofi Annan led the charge to develop the Principles for Responsible Investment, requiring ESG issues to be incorporated into the investment process (Exhibit 1).


Period Investing Strategy Description
1920s Socially Responsible Investing (SRI) Strong demand for SRI products resulted in launch of values-based funds that excluded alcohol, tobacco and gambling.
1930s Responsible Investing (RI) Various corporate scandals and the Great Depression increased focus on governance issues. Differing views on how to define "socially responsible" resulted in some investors dropping the S from SRI.
1990s Sustainable Investing (SI) An increased awareness of climate change; the term "sustainability" was introduced.
2000s ESG Investing The United Nations introduced its Principles of Responsible Investing in 2006, requiring the incorporation of ESG issues into the investment process; UK Pensions Act is amended in 2000 to require consideration of ESG issues in the investment process.

Source: State Street Global Advisors


Demand for ESG assets has risen sharply in recent years. Analysis by US SIF (PDF), an industry association that represents U.S.-based institutional investors and money management firms with sustainability strategies, identified $8.4 trillion in U.S. investment assets that factor ESG policies into investment decisions, accounting for 13 percent of the total assets under management (AUM) in the U.S. market. Policies related to climate change and fossil fuel divestment were among the top priorities, comprising $3.4 trillion and $1.2 trillion, respectively. Other top concerns were avoiding investment in weapons or tobacco industries.

PricewaterhouseCoopers, one of the Big Four accounting firms, projects ESG-related global AUM to rise to $33.9 trillion in 2026 — comprising about 22 percent of the market— up from $18.4 trillion in 2021, an 84 percent increase.

By contrast, according to a January 2022 report by Bloomberg Intelligence, global ESG-related AUM totaled an estimated $41 trillion in 2022, up from $23 trillion in 2016 (Exhibit 2). Bloomberg estimates that ESG assets could exceed $50 trillion by 2025, accounting for one-third of global AUM.


Source: Bloomberg Intelligence

After its 2020 Trends report, the US SIF modified its methodology for the 2022 report. The changes exemplify the difficulties in measuring and defining ESG and reporting issues regarding ESG assets. The US SIF report identified a steep decline in U.S. ESG-related AUM from $17.1 trillion in 2020 to $8.4 trillion in 2022. Some of this drop was due to overall declines in financial markets, but the most likely cause was increased regulatory pressure from the U.S. Securities and Exchange Commission (SEC), which cracked down on misleading ESG claims, a move that resulted in firms withdrawing their sustainability funds. The US SIF report says that “these SEC proposals are motivating asset managers to be more circumspect in what they consider to be assets that incorporate ESG criteria.” Efforts by some Republican elected officials also may be contributing to a declining appetite for these investments, in showing that much of ESG is in many ways more of a marketing tool than an investment tool.


ESG is an all-inclusive phrase for a “broader” viewpoint on stakeholder interests beyond shareholder interests, according to Sehoon Kim, assistant professor in the Department of Finance, Insurance and Real Estate in the Warrington College of Business at the University of Florida. “Stakeholders, by definition, are a broad group of parties with diverging interests regarding the company’s policies. As such, ESG is inherently difficult to pin down with a narrow definition or to measure with accuracy. This is perhaps the biggest ongoing challenge for ESG investing.”

Kim emphasizes, “As with any issue that is open to interpretation and [subjectivity], there is widespread concern that ESG [measures are] also prone to manipulation [‘greenwashing’] precisely given these measurement challenges.” Kim continues, “This challenge is exacerbated by the fact that firms currently face ever greater pressure from stakeholders and stronger incentives to cater to them, despite the fact that it is difficult to determine exactly whom to cater to and how to do so.”

The lack of a universal definition of what constitutes ESG standards, along with inconsistent performance measures, raises significant concerns of “greenwashing.” Corporate greenwashing exists when brands target environmentally and socially conscious consumers by making exaggerated claims or misleading statements to convince the consumer to buy a product. Likewise, a working paper by the Rock Center for Corporate Governance at Stanford University says that a “fund manager engages in greenwashing when it advertises its investment funds as sustainable without engaging in a rigorous process to evaluate ESG quality.” A report by the American Council for Capital Formation points to disclosure limitations and the lack of standardization, company size bias, geographic bias, industry sector bias, inconsistencies among rating agencies, and failure to identify risk as reasons why disparities exist among firms in the accuracy, value and importance of ratings.

For this reason and others, ESG investing practices are receiving pushback from a number of federal and state policymakers. “The ESG movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” says Texas Comptroller Glenn Hegar, whose office is responsible for implementing a 2021 law that requires it to identify financial firms that boycott certain energy companies. (For more information on anti-ESG legislation in Texas and other states, see accompanying article.)


Companies and investment firms using ESG factors as a marketing tool to capitalize on the often personal aspect of ESG investing is a growing concern. For example, Germany’s Deutsche Bank asset management brand, DWS, made headlines in June 2022 when its chief executive said he would resign following allegations of greenwashing. According to Reuters, German prosecutors said at the time that “‘sufficient factual evidence has emerged’ to show that ESG factors were taken into account in a minority of investments ‘but were not taken into account at all in a large number of investments,’ contrary to statements in DWS fund sales prospectuses.”

In March 2021, the SEC launched the Climate and ESG Task Force to “develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.”

A risk alert (PDF) by the SEC’s Division of Examinations acknowledges concern in the ESG rating industry, stating that the “rapid growth in demand, increasing number of ESG products and services, and lack of standardized and precise ESG definitions present certain risks.” The SEC risk alert goes on to state that “the variability and imprecision of industry ESG definitions and terms can create confusion among investors if investment advisers and funds have not clearly and consistently articulated how they define ESG and how they use ESG-related terms, especially when offering products or services to retail investors.” A number of policymakers pushing back on ESG investing contend the SEC, rather than promulgating rules regarding ESG practices, should instead focus on financial rules and regulations. SEC Commissioner Hester Peirce, similarly, saw a “coercive trend” to promote ESG investing in a May 2022 SEC proposal to enhance companies’ disclosure of their ESG strategies. Peirce, one of five SEC members, asked, “Why do we feel compelled to propose such sweeping and prescriptive new rules when we can and do use existing rules to hold funds and advisers to account?”

Many investors applying ESG investing criteria rely heavily on ESG scores provided by ESG rating firms. The scoring of the ESG rating firms, however, is based on unregulated data, and the scoring system can be wildly inconsistent with little clarity on agencies’ methodologies. According to The Economist, for example, a study of six ESG rating firms discovered they used 709 different metrics across 64 categories, and just 10 categories were common among all. Moreover, The Economist reports that credit-rating agencies like Moody’s and S&P Global produce results that are 99 percent correlated, whereas ESG rating firms show correlations only 50 percent of the time. This suggests that results produced by ESG ratings firms only agree half of the time. Market participants using credit ratings and ESG scores must work to understand these differences. For example, Texas’ credit rating was rated AAA by Fitch, S&P Global, Moody’s and KBRA. Each firm, however, handles ESG differently. KBRA does not offer subjective ESG scoring products while Moody’s does. Moody’s integrates ESG profile scores into the published credit analysis and graphically highlights the ESG scores more than the state’s AAA credit rating.


According to research in the journal Review of Accounting Studies, “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.” A similar study surveying more than 1,100 peer-reviewed papers and meta-reviews published between 2015 and 2020 suggested when comparing the financial performance of ESG investing against other investments, “the financial performance of ESG investing has on average been indistinguishable from conventional investing.” Yet, ESG fund managers “typically charge fees 40 percent higher than traditional funds,” according to an article in Harvard Business Review.

The U.S. Department of Labor’s (DOL) November 2022 interpretation of the Employee Retirement Income Security Act of 1974 — which said ESG factors could be considered in making decisions about retirement investments — was opposed by officials concerned that ESG investing places social agendas ahead of fiduciary duties. The sentiment was echoed by Hegar: “Fund managers will be free to consider climate change and other ESG factors rather than aiming to deliver the highest possible returns for American retirees. … These retirees will see their hard-earned dollars diminish as ESG funds fail to deliver promised returns while simultaneously charging higher fees, even as the value of their remaining dollars purchases less due to inflation.”

The U.S. Congress in March repealed the November 2022 DOL ruling, but the repeal was subsequently vetoed by President Joe Biden.


Texas leaders including Hegar have expressed worry over what ESG policies could mean for the oil and gas industry, which encompasses more than just motor oil, heating for the home or electric power generation. According to the U.S. Department of Energy, petrochemicals derived from oil and natural gas make possible the manufacturing of more than 6,000 everyday products and high-tech devices. The extensive list ranges from car parts to eyeglasses, from ballpoint pens to laptops and from fertilizers to footballs.

“Exclusion-based ESG investing strategies undoubtedly have negative impacts on oil and gas businesses, as they raise the cost of capital for companies in these industries,” Kim says. However, Kim adds that “oil and gas companies are also among the most innovative when it comes to developing greener technologies,” such as high quality “green patents” (patents related to environmental technology). In a National Bureau of Economic Research paper (PDF), researchers find that “the incremental green patent is significantly more likely to come from energy firms than any other type of firm, including highly rated ESG firms that are producers of green patents.”


Texas has a diverse energy portfolio. Not only is Texas the top crude oil and natural gas producer in the nation, but it also leads the nation in wind-powered electricity generation and produces more electricity than any other state. Hegar says this diversity is important and that an “intellectually honest conversation” highlighting transparency, fiduciary responsibilities and the continued economic strength of Texas is a necessary step: “We need to make sure we have a balance in use of energy, that we also are taking care of the environment and that we keep our focus on the fundamentals that are so important to the economy.” FN

Learn more about Texas’ investments through the Texas Treasury Safekeeping Trust Company.