Florida taxpayers could pay more for municipal bonds and see lower returns on government pension funds under a bill getting approval by lawmakers that attempts to penalize U.S. companies that consider social and environmental issues when making investment decisions.
The proposal, HB 3, passed the full House and a companion measure, SB 302, got its first hearing Wednesday in the Senate Banking and Insurance Committee, which approved it 8-3 along party lines. Similar laws have been passed in other states, and reports by both state and environmental groups have found the laws led to an increased cost to taxpayers.
The Florida bill bans state and local governments from investing in funds or purchasing bonds based on social, political or ideological interests. It expands on the decision made by Gov. Ron DeSantis and the Florida Cabinet in August to prohibit the State Board of Administration from making so-called ESG investments, the acronym that Wall Street investment firms have used to reflect environment, social and governance factors.
Financial firms say their policies seek to maximize returns and account for emerging conditions, such as the impact of rising global temperatures on a company’s operations. But the ESG concept has increasingly become a target for conservatives who are opposed to seeing the private sector reflect progressive policies.
DeSantis, in his new book released in anticipation of his expected presidential campaign, called for “crippling the ESG movement.” And House Speaker Paul Renner, R-Palm Coast, said he supports the legislation because “corporate elites are using ESG investing to prioritize a liberal agenda” and “are circumventing the Florida Legislature.”
In October, Florida Chief Financial Officer Jimmy Patronis pulled about $2 billion in state treasury investments from BlackRock, a massive asset-management firm, because of its use of ESG ratings. BlackRock CEO Larry Fink told corporate executives in a letter last year that companies using the ratings were “performing better than their peers.”
In many cases, the environmental factors considered in the standards include how companies manage greenhouse gas emissions, air quality and energy management. Social factors include things like good labor policies, improving diversity in the workplace, human rights, demographic trends and political freedom. And the governance standards often include issues such as executive compensation policies, political stability and control of corruption.
“Many corporations and investors are prioritizing environmental, social and governance,” which “makes us more energy dependent, puts pressure on supply chains that gives foreign companies a commercial advantage,’’ Sen. Erin Grall, R-Lake Placid, the Senate sponsor of the bill, said during the committee hearing Wednesday.
Grall called the ESG standards a “marketing tool used by some companies in order to attract investors.” She couldn’t identify any corporations that are intended to be protected by the bill.
Bankers’ lobbyist warns of unintended consequences
But Anthony DiMarco, a lobbyist for the Florida Bankers Association, said the proposal may drive up compliance costs for banks, especially state-chartered community banks, and the language could trap some banks into potential violations.
“Banks base their banking on risk and business profile, and this bill may have the unintended consequences of undoing that,’’ he said.
In other states where similar measures have been adopted, there have been demonstrated and estimated increases in the cost to government.
In 2021, after Texas banned municipalities from doing business with banks that have ESG policies against fossil fuels and firearms, cities saw an increase of $303 million to $532 million in interest payments, according to a study by the Wharton School of the University of Pennsylvania.
The Indiana Pension System estimated that its anti-ESG policy will cost pensioners $6.7 billion over the next decade. The Kansas Pension System estimated its ESG ban will cost the state $3.6 billion. In Kentucky, the pension system refused to implement Treasurer Allison Ball’s anti-ESG blacklist policy, including divesting from BlackRock, because it would lead to a loss for pensioners, and the Kentucky Bankers Association sued the state attorney general over the policy.
The staff analyses for the House and Senate bills note the proposal will increase the cost to local governments for administering the new rule but makes no mention of the potential for the additional cost to pensioners or borrowers.
Bill is ‘making ESG a political statement’
Dwight Mattingly of Hobe Sound, a pension trustee with the Florida AFL-CIO, warned that the bill does the opposite of what lawmakers are trying to prohibit.
“It’s making ESG a political statement,’’ he said.
The trustees of a pension plan have a responsibility to meet the investment return, and “we don’t care if it’s ESG-related or not,’’ he said. “When this bill prohibits an ESG bond, then it seems to be saying to us that we can’t purchase that even though that bond may have a greater return.”
Sen. Bobby Powell, D-West Palm Beach, warned that the vague and broad definitions in the bill will result in “everything being classified as ESG.”
“This is anti-free market in terms of how you define what the free market does in a capitalistic society,’’ he said. “I have not really seen an outcry of people looking for or needing this as a necessity. In my [legislative] office, we deal with a lot of issues. There have been zero people who have called my office about ESG.”
Sen. Geraldine Thompson, D-Orlando, said the bill “puts politics over performance.”
“It seems to me we ought to be concerned about our environment. We ought to be concerned about social ills present in America and the world,’’ she said.
The House sponsor of the bill, Rep. Bob Rommel, R-Naples, has said the intent of the bill is to “send a message” that Florida won’t engage with corporations “exercising corporate activism when issuing bonds.”
At the March 14 meeting of the House State Affairs Committee, Rep. Anna Eskamani, D-Orlando, asked Rommel about the impact on government budgets.
“It seems like this bill will result in fewer banks qualified to hold public deposits, reducing competition, lowering the amount of banks to do business with, and likely lowering interest rates on Florida accounts,’’ she said. “How do we ensure Florida taxpayers don’t lose money?”
Rommel didn’t have an answer. “I’m sorry, I forgot my magic eight ball,’’ he replied.
Mary Ellen Klas can be reached at email@example.com and @MaryEllenKlas