Economic Substance Behind Texas Political Anti-ESG Sanctions.

This article investigates whether the polarized political stances on environmental, social, and governance (ESG) investing between so-called blue (Democratic) and red (Republican) states in the U.S. are reflected in their pension funds’ investment strategies, focusing on a 2021 Texas law that bans state agencies from investing in funds that "boycott" energy companies. The study finds that the Texas-banned ESG funds, despite their pro-ESG branding, are largely index or closet index funds with only a modestly lower allocation to energy stocks (3.5%) compared to similar non-ESG funds (5.7%), challenging the notion of a true boycott. Furthermore, Texas and other red states’ pension funds do not significantly overweight energy sector investments relative to blue states’ pension funds, and banned funds generally outperformed control funds before the ban. The findings suggest that the strong pro- and anti-ESG rhetoric by politicians is not mirrored in the actual investment policies of their states’ pension funds, indicating that ESG has become a politicized term with limited economic substance in this context.