Last week, taxpayers and pensioners notched a victory when Oklahoma’s highest court ruled the state’s Energy Discrimination Elimination Act (EDEA) unconstitutional, permanently ending the law that barred the state from doing business with financial institutions accused of “boycotting” fossil fuels. The ruling marks another welcome setback for efforts to politicize free-market investment decisions through government mandates.
The ruling finally kills the EDEA, an “anti-ESG” law adopted in 2022 to penalize investors perceived as hostile to the fossil fuel industry. The law authorized the Treasurer’s Office to compile a list of financial companies that supposedly boycott the fossil fuel industry, a major expansion of government powers to punish businesses for their investment strategies.
To contract with the state, financial institutions were required to certify that they were not engaging in boycotts, a term the law defined in sweeping and ambiguous ways. In practice, even the appearance that a firm considered climate risk or social policies as part of its fiduciary duty to maximize returns could be enough to trigger exclusion from Oklahoma’s markets.
To comply, public funds like OPERS would have been required to divest from blacklisted asset managers. Aside from the clear constitutional concerns, blacklist laws also have a noticeable taxpayer impact. A report from the Oklahoma Rural Association found that borrowing costs for Oklahoma municipalities rose by 15.7% compared to non-EDEA adopting states—that’s almost $200 million in “additional expenses for local municipalities since the policy’s enactment.”
When government artificially restricts who is allowed to compete for government contracts and services, taxpayers ultimately pay the price. Fewer bidders meant higher borrowing costs, and higher borrowing costs meant fewer roads, smaller schools, and delayed utility projects, or, alternatively, higher taxes to pay for larger yields that enticed investors to be buyers.
A separate estimate indicates that Oklahoma’s law would cost retirees at least $9.7 million in commissions, taxes, and fees. This would be a direct negative impact on the portfolio without any future benefit.
As the Court recognized, this money-losing premise undermines a bedrock principle of public finance. Pension systems like OPERS are constitutionally and legally bound to act “solely in the interest of the participants and beneficiaries.” Yet, the EDEA attempted to force fiduciaries to prioritize political directives over beneficiaries’ financial interests.
These political motives did not go unnoticed. As the Supreme Court affirmed, any attempt to “divest or transfer funds for any purpose other than the benefit” of beneficiaries runs afoul of the state constitution. Fiduciary duty is not a suggestion; it is a constitutional mandate.
The Oklahoma ruling is part of a broader unraveling of so-called “energy discrimination” laws that attempt to dictate how public funds are invested. These laws, often framed as a response to ESG investing, commit the same fundamental error: substituting political judgment for financial expertise. Whether the mandate is to avoid certain companies or to target others, the result is the same: fewer investment options, higher costs, and lower returns.
Laws that force pension systems to pursue political objectives, however well-intentioned, are on shaky legal ground and even shakier financial footing. As courts across the country reach similar conclusions, this reality is becoming increasingly clear.
In February, a federal court struck down a near-identical ESG boycott law in Texas for being “facially overbroad,” and infringing on constitutionally protected speech and activity. The ruling also held that the statute was unconstitutionally vague, with an unclear definition of “boycott” that invited arbitrary and discriminatory enforcement. This type of government micromanagement is something you’d find in states like California and New York, and is surely out of step with the pro-growth, limited government reputations of places like Texas, Oklahoma, and other states with similar statutes.
As I noted at the time, “The bottom line is the government shouldn’t involve itself in the debate over ESG investing—doing so would come at the expense of returns to investors. Let private businesses offer different options and the market will determine which are funded and which aren’t. But state-run retirement plans and pensions should be focused on delivering returns, not squeezed by laws that restrict or require certain types of investments in specific industries.”
The implications are significant for taxpayers and retirees alike. When politically-driven decisions drag down pension returns, the shortfall doesn’t disappear; it gets passed along to taxpayers and investors. Pension funds are meant to deliver secure retirements at the lowest reasonable cost, and the Oklahoma Supreme Court’s decision reaffirms that mission.
Politics should not be part of a state’s investment strategy, and it is refreshing to see another taxpayer win for investment freedom. Other states would be wise to take note before taxpayers are forced to learn the same lesson the hard way.