Pennsylvania RGGI

The Dangers of Environmental, Social, and Governance Mandates

*This testimony was requested by the House Commerce Committee for a hearing that did not occur.*

Chairman Roae, Chairman Galloway and members of the House Commerce Committee, thank you for the opportunity to share our views about HB 2799 and the movement known as Environmental, Social, and Governance – ESG. I am Gordon Tomb, a senior fellow with the Commonwealth Foundation, a free-market think tank that advances policy ideas and proposals to help all Pennsylvanians flourish.

I’ll start by saying ESG mandates are a dangerous trend worthy of your attention.

ESG lays over a business’s traditional objective of maximizing profits other considerations that may or may not be in the best interest of investors. These concerns can range from diversity within the organization – or lack thereof – to climate change.

Amorphous concepts such as “environmental justice” or “carbon footprint” or “gender fluidity” open the door to decisions that serve certain special interests, but are unlikely to benefit most investors, customers, and employees.

In a letter to the U.S. Securities and Exchange Commission, 24 Pennsylvania House members pointed out the danger of replacing market signals with vague virtue signaling among large corporations.

The letter states, “The growth of involvement by corporations in social issues, outside the stated mission of a publicly traded entity, creates a moral hazard to the organization, the investing public, the employees and an entire supply chain.”

It is prudent for lawmakers to safeguard public investments from policy mandates of any kind. That said, we do not believe it is appropriate for the legislature to limit the existence of these products in the private market. In my remarks today I will highlight the poor track record of ESG investments, why ESG mandates are antithetical to the fiduciary duty of public officials, how states around the country are handling this issue, and what Pennsylvania should do.

Poor Track Record of ESG Investments

More and more research is emerging showing how ESG principles suppress returns.

Research by Boston College shows annual returns can fall by as much as 0.9 percent when a state has an ESG mandate in its investment strategy. When that percentage is applied to the $110 billion of assets held by Pennsylvania’s two largest pension funds, we are essentially at $1 billion in lost annual returns.

In a 2019 paper, the Pacific Research Institute’s Wayne Weingarden found that the vast majority of ESG funds returned less than an S&P 500 ETF for the 10-year period ending April 2019.

Wall Street Journal columnist James Freeman writes, “Activists who think they can use public companies to pursue political agendas without endangering shareholder returns are indulging in a fantasy.” Freeman then refers to the California Public Employees’ Retirement System, which has adopted ESG mandates. The system reports “returns lagging behind other large pensions in almost every asset class during the past 10 years, with private equity trailing the most, 1.3 percentage points.”

Distinction Between Private Market and State Investments

More fundamental than whether ESG mandates boost or suppress returns is the question: What is appropriate for public investments? While a private investor can decide to make investment decisions based on ESG criteria, a government should not.

A private investor makes decisions that affect their financial future, but the state treasurer’s office, the State Employees Retirement System (SERS), and the Public School Employees’ Retirement System (PSERS) make investment decisions that impact the financial future of millions of Pennsylvanians. These funds must stay exclusively focused on their fiduciary responsibility, their responsibility to maximize returns.

Government policies that seek to distort market signals should be immediately abandoned. In a 2021 letter to John Kerry, 12 state treasurers, including Pennsylvania Treasurer Stacy Garrity, wrote,” As a collective, we strongly oppose command-and-control economic policies that attempt to bend the free market to the political will of government officials. It is simply antithetical to our nation’s position as a democracy and a capitalist economy for the Executive Branch to bully corporations into curtailing legal activities.”

Vivek Ramaswamy, executive chair of Strive Asset Management, says U.S. markets are no longer free because of ESG, at least to the extent that three of the largest investment firms are forcing their “woke” agendas onto the boards of directors of major corporations. The three firms – Black Rock, State Street and Vanguard – control $22 trillion in assets, an amount larger than the U.S. gross domestic product.

Mr. Ramaswamy describes the situation as a threat to the democratic republic. Even so, he says the best approach for state legislators is to wear their hats as “market actors” with large portfolios rather than as “lawmakers” attempting to regulate markets and triggering unintended consequences.

“To me,” says Mr. Ramaswamy, “this is not just a choice. It’s mandatory because it’s the money of your constituents that is being used to advance this agenda, defrauding them not just of their money but of their voice and their very identity.”

State Approaches to ESG

Using a narrow definition of ESG, at least 13 states have enacted mandates to incorporate ESG criteria into their pension investment strategies. But in the last two years we’ve seen a strong countertrend. International corporate litigator Morgan Lewis reports that over the past year 18 states have proposed or adopted state legislation that would limit the ability of the state government, including public retirement plans, to do business with entities identified as “boycotting” certain industries based on ESG criteria or consider ESG factors in their investment processes.

Morgan Lewis puts these actions in two categories: One where the state directs its investments, toward companies and financial managers that conduct business based on traditional financial metrics and away from those who employ ESG criteria.

The other approach is one where states refuse to do business of any kind with entities who adopt certain positions, say on the right to bear arms or on the burning of fossil fuels.

We at the Commonwealth Foundation recommend that the legislature consider the first kind of action, that is, directing agents such as the treasurer’s office and public pension funds to base investment decisions on financial considerations and their duty to retirees to maximize their investments, rather than basing decisions on ESG goals.

We caution against state boycotts based on political or social views of one kind or another. This latter approach seems fraught with unintended consequences that none of us are likely to predict with accuracy. Consider that the rating system Texas uses to boycott anti-fossil fuel firms took months, is still relatively opaque, and subject to loopholes and whims of politics.  

In other words, mandates of any kind, for or against ESG criteria, infuses more politics and volatility into the pension system.

If the legislature is concerned about the state’s fossil fuel industry being harmed by ESG – a worry that may well be legitimate – policy makers should focus on creating more predictable state regulations on coal and natural gas and evening the playing field between all energy resources by eliminating tax credits, grants, and deferrals.

We urge the legislature to create a clear line that taxpayer-funded programs must be managed by standard fiduciary principles only and avoid pro or anti-ESG mandates.

I’ve included in my testimony a review of ESG related responses from four large states, including Florida, Idaho, West Virginia, and Texas. Florida and Idaho take our recommended approach of putting investment returns above ideological goals while West Virginia and Texas have pursued outright bans on companies engaged in ESG.

Thank you for inviting our comments today and I would be happy to answer your questions.


The Trustees of the State Board of Administration passed a resolution directing the state of Florida’s fund managers to invest state funds in a manner that prioritizes the highest return on investment for Florida’s taxpayers and retirees without considering the ideological agenda of the ESG movement.


Idaho senators passed this year an ESG-related bill that prohibits public agencies engaged in investment activities from considering ESG characteristics in a way that would override typical prudent investment rules. The state House of Representatives also voted in favor of a concurrent resolution stating opposition to ESG standards.

West Virginia

West Virginia’s treasurer placed five financial institutions on a list that bars them from state banking contracts because of their alleged boycott of fossil fuels.


Texas banned 10 financial firms from doing business with the state after Comptroller Glenn Hegar said they did not support the oil and gas industry.