The American Legislative Exchange Council (ALEC), which has been playing a major role in the anti-ESG movement, has introduced model legislation called the “State Government Employee Retirement Protection Act.” I am quite critical of this movement in a number of ways, including the fact that it will harm the citizens in Red states it purports to be protecting, such as Indiana House Bill 1008. But I also think the anti-ESGers are raising some legitimate issues that need to be addressed.

Needless to say, as a registered Democrat and strong advocate of ESG properly used in investing, I approached ALEC’s model legislation with some degree of scepticism. Much to my surprise, I found myself largely in agreement with it. Let me explain why. I will also point out a few issues which I think deserve some constructive discussion.

On the supportive side, definition “c” states that, “When used to qualify a risk or return, the term ‘material’ means a risk or return regarding which there is a substantial likelihood that a reasonable investor would attach importance” when “evaluating the potential financial return and financial risks of an existing or prospective investment.”

China and taiwan tensions and war concept. Fighter aircraft silhouettes over a blurred map of taiwan with Chinese and USA flags on the background. Suitable for tensions between mainland China and Taiwan and Taiwan invasion. | GETTY

Since material ESG factors, such as those developed by the American NGO the Sustainability Accounting Standard Board (SASB), now part of the International Sustainability Standards Board(ISSB), are relevant to risk and return this makes perfect sense to me.

I also like definition “d” defining pecuniary factors as those having “a material effect on the financial risk and/or financial return of an investment” and with the role assigned to ESG factors which is that they should be considered “only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.”

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