Climate change and state investments

Opinion editor's note: Editorials represent the opinions of the Star Tribune Editorial Board, which operates independently from the newsroom.

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Minnesota Auditor Julie Blaha is pushing for the state to adopt what are known as ESG investment guidelines, short for Environmental, Social, Governance. Quietly, more corporations of all sizes have begun adopting these same principles to guide their investment portfolios. It's a welcome development.

So what does ESG investment mean? Like all investments, it's about calculating risk and return. Increasingly — especially when it comes to climate — corporations are viewing fossil fuel investments as having increased risk.

"Investors are moving away from polluters," Blaha told an editorial writer. "The evidence is clear that it makes sense to consider climate when making investments, to move away from fossil fuels and toward a net-zero carbon impact. Polluters are going to be more heavily regulated and pose a greater risk. It just makes good economic sense as the market changes."

The State Board of Investment (SBI) manages state assets and is also responsible for several statewide retirement systems and other investment plans. Recently, the board introduced formal recommendations that respond to climate change.

A three-part SBI report on climate change lays out evidence that rising global temperatures are changing the level of risk for some investments and recommends that factoring in climate change is a critical long-term strategy for protecting investment funds.

"We have the data, we have options and now it's time to choose a course of action," Blaha said. "We have an obligation to protect the state's investments and the pension funds for government workers, teachers, nurses and others who depend on us to make wise decisions."

The roll call of corporations that have adopted ESG guidelines features some of the biggest names: Microsoft, Nike, Accenture, Texas Instruments, Motorola, Hewlett-Packard, Adobe, Apple, Eli Lilly and thousands more. It is not limited to any one sector or type of business. These are all companies looking for strong stock performance and growth. They've found that focusing on ethical, environmental and socially responsible values can be enhancements, not detriments.

Billionaire Michael Bloomberg has become a champion for investments that consider climate change. He founded the Task Force on Climate-Related Financial Disclosures, which has gotten thousands of companies to provide data on emissions and exposure to climate risks voluntarily.

"These and other firms want to be able to price climate risk into their investment decisions, and without accurate and reliable data, they can't do that," Bloomberg wrote in a piece for Bloomberg News. He added that the Securities and Exchange Commission is in the process of adopting reporting requirements built on the framework his task force has created. He puts the cost of climate change-driven weather events at more than $100 billion annually. "Accounting for these and other losses isn't social policy," he wrote. "It's smart investing. Refusing to allow firms to do it comes with big costs to taxpayers."

But ESG's growing popularity has set off a severe backlash. States with significant fossil fuel interests, particularly Republican-led states such as Texas, Oklahoma and Florida, have labeled such practices "woke investing" and are aiming to punish such companies.

In Texas, that has meant a law barring local governments from doing business with banks that have ESG policies against fossil fuels and, for good measure, guns. (Why guns? It's Texas.) According to a Wharton Business School study, that has already cost taxpayers $532 million in additional costs. Why? Cities are now limited as to who can underwrite their municipal bonds. This situation was exacerbated after some of the largest underwriters in the country left the Texas market, including JPMorgan Chase, Goldman Sachs, Bank of America and Fidelity.

Blaha, a Democrat running for re-election against Republican Ryan Wilson, argues that corporations aren't weighing climate change impact because they're particularly "woke" but instead because it "makes good financial sense."

Blaha favors the nuanced recommendations in the report SIB commissioned. "It boils down to three simple things," she said. "Take a climate-aware approach to investing, aim ultimately for a net-zero carbon portfolio and, as a last resort, the divestment approach."

There are no guarantees in the stock market, ever. But the growing realization that flouting climate change carries considerable risk is long overdue.