Ohio legislature mulls anti-ESG bill

Ohio state legislators are considering a bill that would bar the state’s pension systems, state colleges and universities and the Bureau of Workers’ Compensation from prioritizing environment, social and governance factors when making investment decisions. 

Ohio’s assigns Ohio a triple-A long-term issuer default rating and general obligation rating, pointing to consistently balanced budgets, growing fiscal reserves and a low long-term liability burden.

Moody’s Ratings in December upgraded Ohio’s issuer rating to Aaa and revised the outlook to stable.

S&P Global Ratings in December raised Ohio’s general obligation bond rating to AAA from AA-plus and raised its long-term rating on the state’s tax credit bonds to AA from AA-minus.

In its rating report, S&P noted Ohio’s “significant pension-reform changes that have contributed to improved funding progress and significant benefit flexibility to adjust other postemployment benefits. 

“We consider Ohio in a good position to manage its pension liabilities,” the rating agency noted. “Over the past several years, the state committed to paying contributions equal to or above its actuarially determined contribution across all its plans.”

Senate Bill 6 is the latest salvo in a battle over ESG investing that has seen some states pass legislation targeting banks and other financial firms as well as local governments in an attempt to curtail ESG investing or boycotts of the fossil fuels industry. 

Despite a recent study finding that a Texas law targeting underwriters has driven down competition in the municipal bond market for Texas debt, leading to higher interest costs for local governments, and despite a lawsuit by the Securities Industry and Financial Markets Association against the state of Missouri over its two new anti-ESG securities rules, Republicans continue to favor bans on ESG considerations.

A 2020 study by Morningstar, a financial services and data firm, found that sustainable funds outperformed non-ESG funds over one, three, five and 10 years, the Financial Times reported. 

Morningstar looked at seven asset classes, and U.S. large-cap blend equity funds pursuing ESG investing performed the strongest. Over 80% of those funds beat traditional funds over the previous decade, while three in 10 euro corporate bond funds managed to do the same. 

Hortense Bioy, director of passive strategies and sustainability research at Morningstar, told the FT that the findings prove there is no “performance penalty” from ESG investing. 

A report from Morgan Stanley released last August found mixed results for ESG funds, with sustainable funds underperforming in 2022 only to recover and outperform non-ESG funds in the first half of 2023, with a median return of 6.9% to traditional funds’ 3.8%.

There is some evidence to suggest that over the long term, ESG funds will grow in size and importance; Morgan Stanley said investor demand for the funds is rising, and they drew cumulative inflows of $57 billion in the first half of 2023. Most of those flows were in Europe, however, and a market that favors value and short-term assets could lead ESG funds to underperform again.

Still, as long as growth stocks prioritizing long-term considerations are ascendant, sustainable funds will benefit, Morgan Stanley said, “given their more growth-oriented, longer-term positioning.”