In recent years “environmental, social, and governance” (ESG) investing has become a prominent topic in the financial world as some large asset managers have claimed they will now invest money based on political goals rather than the longstanding norm of maximizing returns.

Oklahoma lawmakers voted to prohibit ESG asset managers from having state contracts, arguing that ESG ultimately reduces taxpayer benefits compared to traditional investing strategies.

The law has drawn pushback, including from the managers of the Oklahoma Public Employees’ Retirement System (OPERS). But a new study, of which I am one of three co-authors, shows that lawmakers were justified in passing the law.

And our study finds that OPERS’ insistence on ESG-promoting asset managers has already cost the state a million dollars annually. 

We identify many problems with the ESG approach.

For one thing, ESG ratings vary wildly from one asset manager to another, because each is based on proprietary methodologies. That means the ratings themselves have little basis in reality. For example, a 2022 study by Raghunandun and Rajgopal found that companies with high Sustainalytics (now Morningstar) ESG scores had worse records on compliance with labor and environmental laws than companies in non-ESG portfolios.

Furthermore, the financial performance of ESG funds is not superior to traditional investing strategies. A study published in the Journal of Sustainable Finance in 2022 reviewed 1,141 primary peer-reviewed papers as well as an additional 27 meta-reviews between 2015 and 2020. The study concluded that, on average, ESG investing had investment results that were indistinguishable from conventional investing strategies.

Historically ESG-embracing BlackRock manages billions of dollars of Oklahoma’s public pension funds—including more than half of OPERS assets. In the 2019-20 proxy season, which appears to be prior to the company embracing ESG, BlackRock voted for only about 6% of environmental proposals. But in the 2020-21 proxy season, after joining ESG climate initiatives, BlackRock voted for 64% of environmental proposals—including proposals Blackrock expressly labeled as “not in shareholders’ best interests” just a year prior.

Yet the board of OPERS has stuck with Blackrock, claiming that switching asset managers would cost state pensions over $10 million. However, Oklahoma Treasurer Todd Russ found that there are “zero or near-zero” switching costs for at least five of the eight funds at issue.

And OPERS officials ignore the fact that the system would save, on average, over a million dollars a year if it switched its large-cap funds to T. Rowe Price.

Oklahoma’s Energy Discrimination Elimination Act is based on sound financial principles that maximize taxpayer benefits and deter attacks on our energy sector. OPERS, and any other state pension system that may be doing so, should stop fighting this sensible law and instead embrace it.