In 2022, Oklahoma lawmakers passed the “Energy Discrimination Elimination Act” (EDEA), which requires the office of the state treasurer to identify firms that boycott investments in oil and gas companies due to those firms’ embrace of “environmental, social, and governance” (ESG) policies.

State entities, including state pension funds, cannot contract with firms on that list.

Oklahoma legislators passed the law because ESG firms seek to deprive oil-and-gas companies of access to capital and those firms are the foundation of the state economy. In addition, lawmakers noted that ESG policies produce lower investment returns for workers depending on state retirement systems.

A class-action lawsuit targeting American Airlines’ reliance on ESG firms in the management of its employees’ pensions shows that some retired workers agree with Oklahoma lawmakers.

The complaint filed by pilot Bryan P. Spence as a representative of all pilots negatively impacted by ESG investment of American Airlines’ pension assets stated: “Defendants have breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (‘ESG’) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants. The unlawful decision to pursue unrelated policy goals over the financial health of the Plan is not only flatly inconsistent with Defendants’ fiduciary responsibilities, it jeopardizes the retirement security of hundreds of thousands of American Airlines employees.”

ERISA refers to the federal Employee Retirement Income Security Act.

The lawsuit noted that ESG funds produce lower returns at higher cost to retirees, stating that “many of the ESG funds that Defendants have included in the Plan are more expensive for Plan participants to own compared with similar non-ESG investment funds, underperform financially compared with similar non-ESG investment funds, and engage in shareholder activism to achieve ESG policy agendas rather than maximize the risk-adjusted financial returns for Plan participants.”

The complaint pointed out that a sizable body of research shows ESG funds produce lower returns than funds managed based on the principle of profit maximization.

“ESG funds have an established record of underperformance,” the complaint stated. “In a recent paper published in the Journal of Finance, University of Chicago researchers analyzed Morningstar ESG ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest ESG-rated funds attracted more capital than the lowest rated funds, none of the high ESG-rated funds outperformed any of the lowest rated funds.”

That underperformance has a significant impact on the financial security of retirees who depend upon a pension plan, especially as the negative impact of ESG investing accumulates over time, the complaint noted.

“Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return,” the complaint stated. “This means an investor who puts $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market.”

The poor returns generated by ESG investing are a feature, not a bug, of the ESG system, the complaint noted.

“Depressed returns for ESG investing are predictable, given that the measures being pressed by left-leaning groups interfere with merit and performance standards, while contributing to lost opportunities,” the complaint stated. “A meta-review of more than 2,000 studies found that ESG-focused investing depressed returns. And a performance review published in 2020 found that pension funds with an ESG orientation lagged those of non-ESG funds by two basis points per year over a ten-year period.”

American Airlines sought to have the case tossed, but in June the company’s motion for summary judgment was denied. The case continues to proceed through the court system.

Oklahoma’s “Energy Discrimination Elimination Act” is also tied up in court.

A lawsuit filed this year resulted in a temporary injunction that keeps the law from being enforced. The plaintiff in that case argued his state pension benefits could be harmed if Oklahoma pensions do not invest in the funds targeted by the law—those that prioritize ESG policies.

But research continues to show the pensioner in the Oklahoma case is likely better off with the “Energy Discrimination Elimination Act” in place than without it, including a recent study released by the American Energy Institute.

“As we release this comprehensive analysis, it’s clear that the Energy Discrimination Elimination Act of 2022 is crucial for safeguarding Oklahoma’s economic interests and ensuring sound fiduciary practices,” said Jason Isaac, CEO of the American Energy Institute. “Our research debunks the flawed claims against the EDEA, highlighting its role in protecting vital energy sectors and promoting financial stability for the state.”