The ongoing wave of anti-ESG legislation in Republican controlled state houses continued with Kansas passing its own version. Compared to sweeping changes proposed by other states, Kansas’ anti-ESG legislation is rather limited. Given that Governor Laura Kelly is a Democrat, and the Legislature is under Republican control, a more moderate bill should have been expected. The nature of divided government.
Environmental, Social, and Governance (ESG) is a type of investing where factors beyond profits are considered when making financial decisions. For a more in-depth look at the development of ESG, I encourage you to read “What is ESG?”
In Kansas’ legislation, ESG has a very specific, but limited definition. It defines ESG as giving preferential treatment or discriminating against a company based on a list of factors. The factors include entire industries relating to environmental concerns, specifically energy, agriculture, lumber, and mining. The manufacture and sale of firearms and ammunition is also a listed industry, a nod to the Republican base and the broader debate over the Second Amendment.
Beyond industry sectors, the definition included corporate actions. Looking at environmental policies, the emission of greenhouse gases is considered an ESG factor, including the disclosure or offsetting of greenhouse gas emissions. For social policies, ESG includes a company’s choice to assist or not in an employee’s abortion or “gender reassignment services.” It also includes the consideration of a company’s board or officers’ race, ethnicity, sex, or sexual orientation.
That narrow definition does not prohibit other ESG considerations. Other states have used a broader definition which eliminates the consideration of all non-financial factors, using a pecuniary factor definition which originated under Trump’s Department of Labor. This list is similar to the Texas approach.
The impact of the anti-ESG legislation is also limited, focusing exclusively on actions by the government. The legislation limits how state funds can be invested, prohibiting the consideration of ESG factors. The same applies for the investment of funds in the Kansas Public Employees Retirement System. The use of state money in pushing back on ESG has been a common tool of states, as that is easy for them to control, and the parameters can easily be changed either under state law or through executive action.
The legislation also limits the ability of state agencies and local governments to use ESG factors in issuing contracts. Nothing in the legislation prevents companies from engaging in ESG factors, they simply cannot be chosen based on those factors.
While the limited approach may appear to be a more moderate consideration, there are some dangers. The broader approach focuses the attention strictly on financial factors. A financial consideration approach means the financial impacts of a company’s choice to participate in ESG can be considered. The right has been using the phrase “go woke, go broke.” Some on the left have argued that the use of ESG results in higher profits. The market will decide who is correct. The limited approach closes the door on those considerations, at least in the specific industries listed in the legislation.