pennsylvania esg

Environmental Social and Governance (ESG) Mandates in Pennsylvania

Key Points

  • Studies show adopting Environmental Social and Governance (ESG) criteria is not associated with better labor or environmental regulatory compliance.
  • Emerging studies show ESG criteria are associated with lower returns.
  • At least 12 states mandate incorporating ESG criteria into their pension investment strategies.
  • Seventeen states restrict the use of ESG criteria. These range from restricting the financial institutions a state utilizes to affirming the state’s fiduciary responsibility to maximize returns for retirees and state employees.
  • Pennsylvania should take steps to protect pensioner investment returns, while avoiding market manipulation through ESG bans or mandates.

Defining ESG

ESG policies change the “traditional frameworks of evaluating businesses and assessing investment risk. Rather than determining the creditworthiness and value of a business or industry based upon objective measures such as profit, return on investment, consumer demand, and other material performance measures, ESG’s architects seek to judge entities based upon subjective and difficult to quantify goals. . . Entities deemed unworthy, such as those involved in the hydrocarbon extraction business, firearm manufacturing, or even agricultural production, are being frozen out of financial markets.”[1]

ESG can be adopted by a company to guide investment decisions or by a government to guide state investments. These concerns include environmental, such as climate change; social, including diversity within the organization; and governance, as related to ethics and transparency.

Amorphous concepts such as “environmental justice,” “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.

Businesses should have the option to pursue ESG over or in tandem with profits. However, if and how they do so should be transparent to investors, and the government should refrain from regulations or tax rules that put a thumb on the scale in favor of ESG goals.

The Rising Popularity of ESG

Today’s ESG has its origins in a speech by former UN Secretary-General Kofi Annan at the Davos World Economic Forum in 1999.[2] Over time, large investment firms created ESG funds. In 2006, the Principles of Responsible Investment Association launched with 63 member financial institutions. By 2022, PRI reported 3,826 members.[3]

Bankrate cites Morningstar that global ESG fund assets reached about $2.5 trillion at the end of 2022, outpacing growth in the broader global fund market. Europe counts for most ESG fund assets, 83 percent at the end of 2022. The United States accounts for 11 percent of ESG fund assets.[4]

Corporations adopt ESG objectives for two reasons:

  • In some cases, the boards of publicly traded companies make controversial votes to adhere to specific ESG goals.
  • Another driving force is the heavy hand of a state or federal government to enact ESG investment criteria mandates or other policies that give preferred treatment to corporations using ESG criteria.

Large investment firms are the most visible proponents of ESG, but the companies harmed by limited access to financial services, such as loans and insurance, are relatively small. For example, James Lofton, managing partner at Jan Resources testified before the Texas legislature, “Even though we had strong financial statements, had never missed a payment, and had not overextended our credit, Chase Bank decided to cut us off at the knees because suddenly, oil and gas was ‘no longer a market they were interested in,’ as our banker told us. Our credit line of $500,000 was cancelled.”[5]

Poor Record of Financial Performance

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.[6]
    • That percentage applied to the $110 billion of assets held by Pennsylvania’s two largest pension funds, equates to $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 a Standard and Poor’s (S&P) 500 Index exchange-traded fund (ETF) for the 10-year period spanning April 2009 to April 2019.[7]
  • The California Public Employees’ Retirement System, which adopted ESG mandates in 2016, 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.”[8]
  • In a recent Journal of Finance paper, researchers at the University of Chicago analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. None of the high-sustainability funds outperformed any of the lowest-rated funds.[9]

It is possible that investors are willing to sacrifice financial returns in exchange for better environmental outcomes, but the environmental track record of ESG investments is also lacking.

Poor Record of Environmental Performance

  • Researchers at Columbia University and London School of Economics compared the ESG record of U.S. companies in 147 ESG fund portfolios and U.S. companies in 2,428 non-ESG portfolios. They found companies in the ESG portfolios had worse compliance records for both labor and environmental rules.[10]
    • They also found that companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.
  • A recent European Corporate Governance Institute paper compared the ESG scores of companies invested in by 684 U.S. institutional investors that signed the UN’s Principles of Responsible Investment (PRI) and 6,481 institutional investors that did not sign the PRI within the sample period 2013 to 2017.[11]
    • They did not detect any improvement in the ESG scores of companies held by PRI signatory funds subsequent to their signing. Furthermore, the financial returns were lower and the operational risk “higher” for the PRI signatories.

ESG in State Government

Are ESG government mandates appropriate for public investments? While a private investor can decide whether to invest 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 requirement, their responsibility to maximize returns.

Yet, using a narrow definition of ESG, at least 12 states have enacted mandates to incorporate ESG criteria into their pension investment strategies. After the recent backlash against ESG, high-ranking state officials including treasurers and pension managers have engaged in publicity campaigns to defend ESG mandates.

  • In 2022, a group of 13 state treasurers issued a statement calling ESG mandates a strategy for the long term.[12]
  • In 2023, the Freedom to Invest coalition launched by calling on lawmakers and state officials to stand up for the “freedom to invest responsibly.”[13]

On the other hand, 17 states have 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.

There are many nuances between state laws and guidance on rejecting ESG considerations in state investments, but they fall into two broad categories.

  • A 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.
    • For example, Idaho enacted an ESG-related law that prohibits public agencies engaged in investment activities from considering ESG characteristics in a way that would override typical prudent investment rules.[14]
  • Secondly, states can adopt broad prohibitions on doing business with firms utilizing ESG criteria and its biased against fossil fuel entities and non-favored ESG industries.
    • For example, in West Virginia, the treasurer placed five financial institutions on a list that bars them from state banking contracts because of their alleged boycott of fossil fuels.[15] Likewise, 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.[16]

ESG in Pennsylvania

  • Pennsylvania Treasurer Stacy Garrity opposes applying ESG criteria to state investments.[17] “My agency directly invests about $46 billion. Pennsylvania law requires the state treasurer to use prudent investment standards. What that means is the only goal I have when making investment decisions is to protect the interests of our taxpayers. ESG proponents tend to care less about investment returns and more about the specific policy goals they’re pushing.”
    • Garrity was one of 12 state treasurers signing a 2021 letter to John Kerry opposing ESG command and control policies that politicize the economy.[18]
  • In a 2022 letter to the U.S. Securities and Exchange Commission (SEC), 24 Pennsylvania House members pointed out the moral hazard of undermining the fiduciary responsibilities of state pension plans by replacing market signals with vague virtue signaling.[19]
  • House Bill 334 seeks to prohibit financial institutions from discriminating against customers based on ESG criteria, and ensures financial institutions utilizing ESG criteria in their services disclose those parameters to customers.[20] The legislation—reintroduced this year—has several shortcomings.
    • It does not protect investors by placing restrictions on utilizing ESG criteria in pension investments, unlike a 2022 version of the bill.
    • More concerning, the bill focuses on restricting the activity of private sector actors.
    • Even restrictions on public/government investing or contracting seem fraught with unintended consequences. 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.[21]
  • If the legislature has concerns about the state’s fossil fuel industry being harmed by ESG—a worry that may well be legitimate—policymakers 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.
  • Seeking to combat government mandates with counter-mandates is a dangerous proposition. Jennifer Schulp, a financial scholar at the Cato Institute, writes, “by seeking to enshrine political ideology into financial decision‐making, ESG opponents undermine the same free markets they purport to protect, in turn decreasing returns for pension beneficiaries and raising costs for taxpayers.”[22]
  • Model legislation creating a competitive market for energy production can protect Pennsylvanians invested in state pension funds by making it clear that the “sole interest” rule prohibits fiduciaries from managing state funds in a way designed to further “non-pecuniary, environmental, social, political, ideological, or other goals or objectives. Further, legislation should withdraw proxy-voting authority from all outside asset managers.[23]

ESG and the Federal Government

In March this year, Congress passed a law to overturn a U.S. Labor Department rule allowing fund managers to consider ESG issues in a situation where multiple investment plans equally benefit clients. Weeks later President Biden vetoed the law, the first veto of his presidency.[24]

Fiduciary requirements within the Employee Retirement Income Security Act (ERISA) limit the impact of this policy change. However, the ability of managers to consider ESG factors in certain situations is concerning. Even more concerning the Biden Rule also uses slightly different language to define a tie and removes the formal requirement that these ties need documentation.[25]


Weaponizing the management of investments to achieve political objectives, whether ESG or the promotion of a particular industry—is an unhealthy politicization of the economy. Government policy should avoid pro- or anti-ESG regulations and focus on enforcing transparency for private investors.

[1]Jack McPherrin, “ESG Scores: A Threat to Individual Liberty, Free Markets and the U.S. Economy,” (Arlington Heights, IL: Heartland Institute, April 2023), 4,

[2]Rupert Darwall, “ESG RIP: Review of Terrence Keeley’s ‘Sustainable,’ Part 1: Davos, the UN, and the Rise of ESG,” Real Clear, December 12, 2022,

[3]Principles for Responsible Investment, “About the PRI,” accessed August 20, 2023,

[4]Brian Baker, “ESG Investing Statistics 2023,” Bankrate, January 31, 2023,

[5]Brad Johnson, “Texas Preparing ESG Retaliation as Obstacles Mount for Fossil Fuel Financing,” The Texan, August 4, 2022,

[6]Jean-Pierre Aubry, “ESG Investing and Public Pensions: An Update,” Issue Brief 74, Center for Retirement Research at Boston College, October 2020,

[7]Wayne Weingarden, “Environmental, Social, and Governance (ESG) Investing: An Evaluation of the Evidence,” Pacific Research Institute, May 2019,

[8]James Freeman, “An ESG Giant Stumbles,” Wall Street Journal, September 22, 2022,

[9]Samuel M. Hartzmark and Abigail B. Sussman, “Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows,” Journal of Finance, 74, No. 6, (December 2019), 2789–837,

[10]Aneesh Raghunandan and Shivaram Rajgopal, “Do ESG Funds Make Stakeholder-Friendly Investments?” Review of Account Studies 27, (2022), 822–63,

[11]Rajna Gibson Brandon et al., “Do Responsible Investors Invest Responsibly?” European Corporate Governance Institute (ECGI), February 07, 2022 [last revised],

[12]For the Long Term (FTLT), “Our Stand for the Free Market,” accessed August 18, 2023,

[13]Freedom to Invest Coalition, “Voices,” accessed August 18, 2023,

[14]Idaho Code § 67-2345 (2022), “Disfavored State Investments,”

[15]West Virginia State Treasurer Riley Moore, “Restricted Financial Institution List,” July 28, 2022,

[16]Mitchell Ferman, “Texas Bans Local, State Government Entities from Doing Business with Firms That ‘Boycott’ Fossil Fuels,” Texas Tribune, August 24, 2022,

[17]DVJ Editor, Podcast: “Pa Treasurer Garrity Talks Organized Retail Crime, ESG,” Delaware Valley Journal, January 19, 2023,

[18]West Virginia Office of the State Treasurer, release (Letter to John Kerry from state treasurers with signatures), May 25, 2021,

[19]Pennsylvania House Republican Caucus, “PA Lawmakers Warn SEC Some Corporations May be Putting Investors, Beneficiaries at Risk; Urge Investigation,” press release, June 30, 2022,,-Beneficiaries-at-Risk;-Urge-Investigation

[20]Rep. Perry Stambaugh, House Bill 334, Pennsylvania General Assembly, Regular Session 2023–24,

[21]Adam Aton, “Inside Texas’ Attempt to Turn ESG Upside Down,” Climatewire, September 6, 2022,

[22]Jennifer J. Schulp, “Anti-ESG Legislation is Demonstrating the Peril of Meddling in Markets,” Cato Institute, June 14, 2023,

[23]American Legislative Exchange Council, Model Policy: “State Government Employee Retirement Protection Act,” July 29, 2022,

[24]U.S. Senate, “Vetoes by President Joseph R. Biden Jr.,” accessed August 2023,

[25]Alicia Munnell, “Department of Labor’s Rule for ESG Investment Hasn’t Changed from Trump to Biden,” Center for Retirement Research at Boston College, June 21, 2023,; see also 29 U.S.C. 1001 Et Seq., Employee Retirement Security Act of 1974 (ERISA).