​You may have heard of the term “ESG” and wondered what does it mean? That answer is important for everyone to know, as we see this movement gaining steam. ESG is the acronym for Environmental, Social, and Governance. Certain investors and large, publicly-traded financial institutions are using ESG scores or ratings to determine whether a corporation is “socially responsible” and therefore whether they are worthy of investing in or offering services to.

The key focus of ES​G​ is to advance the United Nations Sustainable Development Goals, which include climate action, clean energy, gender equality, and responsible consumption and production. Although we all can agree that we want to protect the environment, stop discrimination, and encourage diversity ESG goes well beyond simply recommending that companies follow these principle​s. Instead, ESG is being used to force corporate policy changes, even if it is at the expense of an investment or financial firm’s fiduciary duty to its clients.

ESG suggests that two princip​le​s should exist in corporate America: (1) Corporate officers and directors should advance the interests of all corporate “stakeholders,” not just “shareholders,” and (2) Corporate performance should be evaluated by a “new measure of shared value creation” that explicitly includes ESG​​ goals in addition to traditional financial metrics. But who decides which ESG factors should be imposed? How do we know whether a corporation is complying? Should corporations prioritize the interests of society over the interests of its shareholders?

When calculating the scores, the “E” asks how corporations interact with the environment. Specific criteria include corporate impact on climate change, greenhouse gas emission air pollution, and water usage. Often, companies are expected to have set goals in line with the 2015 Paris Agreement for climate action. The “S” focuses on social issues such as labor standards, human rights, social dialogue, pay equity, workplace diversity, access to health care, and racial justice, to name a few. The “G” refers to how the corporation is internally governed and how its leadership acts. Factors include corporate fraud, anti-corruption efforts, board diversity, and potential illegal activity.

How are you feeling at this point about the likely scores generated by midwest production agriculture, oil and gas producers, and energy networks that include coal and natural gas assets?

It is important to know that the ESG movement is creating several legal concerns. First, ESG investing presents legal issues for fiduciaries responsible for investing other people’s money. For example, imagine an investment firm is responsible for investing retirement or pension accounts. The firm’s chief responsibility is to provide the best return for the individuals who will rely on these accounts for their future income. However, if the firm has adopted an ESG policy, the investment portfolio for the accounts may not include the most profitable companies because the companies do not align with the firm’s ESG standards. That means retirees could lose out because the investment firm is prioritizing advancing an agenda over its responsibility to its account holders.

In addition, concerted ESG-based collusion and coercion against disfavored businesses raises serious legal questions under federal and state antitrust laws. Finally, ESG threatens to change the workplace in ways that might cause employees to violate federal and state employment laws.​

It is important to remember that the Nebraska Investment Council oversees the investment activity of more than $23 billion in state funds, including the assets of the retirement systems administered by the Public Employees Retirement Board. The Investment Council’s voting members must “discharge their duties with respect to the assets of the retirement system solely in the interests of the members and beneficiaries of the retirement system and for the exclusive purposes of (1) providing benefits to members, and members’ beneficiaries, and (2) defraying reasonable expenses incurred within the limitations and according to the powers, duties, and purposes prescribed by law.” The Investment Council recognizes that the benefits it seeks are financial in nature, identifying its “mission” as “delivering investment management services to provide direct financial benefit exclusively to the owners of the funds entrusted to the Council.

As the ESG movement continues, you can be assured that the Nebraska Legislature will be watching closely. If necessary, the Unicameral will act to prevent businesses and individuals in Nebraska from discrimination and to protect state employee pension funds.

If you have any questions or comments regarding ESG or ideas for legislation​​, please feel free to reach out to me at 402-471-2729, or email me at mjacobson@leg.ne.gov. My door is always open!