Economic Substance Behind Texas Political Anti-ESG Sanctions

A stark contrast exists between the stated preferences of politicians in the so-called blue states (Democrats) and those in red states (Republicans) on environmental, social, and governance (ESG) matters. We examine whether these polarized political stances are reflected in the investment strategies of respective states’ pension funds. We examine a Texas directive that the state agencies divest from investment companies that profess a pro-ESG stance and allegedly “boycott” energy stocks. We find that funds banned by the Texas directive, despite carrying ESG-focused titles, are largely indexers with a tilt slightly away from energy stocks and slightly toward technology stocks. Banning such funds would make little difference to Texas pensioners or Texas energy companies, because the returns and stock holdings of banned funds are not meaningfully different from those of size-matched funds that do not proclaim an ESG focus. Pension funds in red states do not act per their politicians’ stance and largely follow market trends in their investment strategies. They have similar exposures to technology and energy stocks, as do pension funds in blue states. We conclude that the vehement pro– and anti–fossil fuel proclamations of blue and red states’ politicians, respectively, are not observed in their own state pension funds’ investment policies over which politicians have better control than on external funds.