24 states ban ESG investing through public pension funds

The backlash could lead to lawsuits against public pension fund managers who favor ESG efforts.

Marc Brnovitch

A major Republican backlash is underway in at least 24 US states against public pension fund managers making investment decisions based on environmental, social and governance (ESG) concerns and principles.

Those leading the reaction say that when the ESG filter is applied to investment decisions, it leads to portfolio losses, which hurt retirees. Non-ESG investments are superior because they generate higher returns, according to the anti-ESG camp.

Other backlash supporters say the effort could ultimately lead to further legal challenges, with fund managers and related staff being sued for defying emerging anti-ESG policies.

However, there was a backlash in the form of a letter from an organization known as Long-Term, a “501(c)(3) public charity that supports state, city and , counties and tribes”. The letter, dated Sept. 14, is signed by 13 state treasurers and the New York City Comptroller.

“Several states in our country have begun blacklisting financial firms that disagree with their political views. West Virginia, Idaho, Oklahoma, Texas, and Florida have created new policies and laws that restrict who they will do business with, reducing competition and restricting access to many high-quality managers . This strategy has real costs that ultimately impact their ratepayers,” according to the letter. (More information on the letter is featured in the Minding the Gap blog available here: https://bit.ly/3xwjov3 .)

The backlash got off to an inauspicious start last April when the American Legislative Exchange Council (ALEC), a group of state legislators, proposed a new framework for state pensions that would discourage ESG in favor of “ fiduciary rules to protect retirees from politically motivated investment strategies. ”

Then, in August, Mark Brnovich, Arizona’s attorney general, reported that he had created “a 19-state coalition that sent a letter to BlackRock Inc., exposing its practices of placing leftist politics at the above investors’ interests and returns”.

FTF News contacted BlackRock officials for comment, but they never responded. However, Dalia Blass, Senior Managing Director, Head of External Affairs at BlackRock, issued a letter in response to Brnovich’s coalition last month.

“Your letter contains several misrepresentations about BlackRock’s motive for participating in various ESG-related initiatives. … Our participation in these initiatives is entirely consistent with our fiduciary obligations,” Blass says in the August 4 letter.

BlackRock offers “investment products that … allow clients to gain broad market exposure, including to energy companies, and make energy-specific investments,” Blass said.

“Your letter implies that BlackRock has full discretion over where and how public pension fund investments and votes are directed. This is not the case. As a fiduciary, we are required to adhere to our clients’ investment guidelines and objectives, including those specified by your state pension funds,” Blass adds.

Regardless of BlackRock’s response, other states have followed in Arizona’s footsteps.

Todd Rokita

On September 1, Todd Rokita, Indiana’s attorney general, said in a letter to the Indiana Senate that state law prohibits the board of the Indiana Public Retirement System (INPRS) ” or its contracted investment managers to choose investments or investment strategies based on ESG considerations… For the same reasons, the board cannot exercise any rights pertaining to its investment, such as voting rights proxy, based on ESG considerations, nor retain investment advisers who make investments, define investment strategies or exercise proxy voting rights relating to investments based on ESG considerations.

Wasting no time in Louisiana, Pelican State Attorney General Jeff Landry issued a directive on August 30 that warns of “the possible negative impact on state pension funds” of the rulings. based on ESG.

Firms operating as registered investment advisers (RIAs) and using ESG factors without full disclosure “are likely to violate their fiduciary duties imposed by Louisiana law. In Louisiana, such investor-clients include entities such as the Louisiana Treasury and Louisiana State Retirement Boards…including the Louisiana State Employees Retirement System (LASERS),” Landry says.

Prior to Louisiana, Ron DeSantis, Governor of Florida and his fellow State Board of Administration (SBA) trustees on August 23 “passed a resolution directing Florida State fund managers to invest state funds in a way that prioritizes the highest return on investment for Florida taxpayers and retirees regardless of the movement… (ESG).”

Glenn Hegar

The next day, in a state that prides itself on becoming great, Texas went a step further when state comptroller Glenn Hegar released a list of financial services companies he says are boycotting energy companies via ESG. Hegar’s list includes BlackRock, BNP Paribas, Credit Suisse Group, Danske Bank, Jupiter Fund Management, Nordea Bank, Schroders, Svenska Handelsbanken, Swedbank and UBS Group.

Financial services companies, banks and publicly traded investment firms “are subject to the assignment provisions” of Texas law, Hegar notes. “In addition, Comptroller staff conducted research on individual investment funds, generating a list of nearly 350 funds subject to the same provisions as companies.”

Unsurprisingly, the backlash was pushed back.

FTF News contacted Hegar and all of the companies on Hegar’s list. The only answer was from Schroders.

“We strongly disagree with the decision of the State of Texas. Schroders does not boycott fossil fuels and, in fact, has allocated $19 billion to companies active in the energy sector globally,” according to the Schroders rep.

“We are committed to maximizing returns for our customers by actively engaging with these companies. We help them navigate and adapt to the opportunities and risks their businesses face in the energy transition needed to mitigate climate change. This engagement process is driven by the data and in-depth analysis we undertake to assess and manage potential investment risk,” the spokesperson adds. “We will continue to engage with our clients, peers and other stakeholders to ensure that our investment approach and the drivers behind it are properly understood.”

Late last month, the Investment Company Institute (ICI) also released a statement in response to Hegar.

“The Texas Comptroller’s announcement…a step toward Texas state agencies boycotting hundreds of investment funds, will only harm the ability of police, firefighters, teachers, and other Texas state officials to save for a secure financial future,” according to ICI. .

“Texas state pension managers have a fiduciary duty to act in the best interests of state employees. However, a state-mandated boycott of some funds could restrict their ability to choose from the full range of investments available on behalf of Texas state retirees. This decision impacts billions of dollars in retirement savings for many Texans. … The merits of named ESG-linked funds, which operate in a competitive market, should be judged primarily by their ability to meet the long-term goals of Texas state retirees. … State pension fund managers must be able to consider a wide range of investments that best meet the needs of these policy-free, Texas savers,” according to the ICI statement.

The next step in the ESG backlash could be a new type of accountability for public pension fund staff, according to an opinion piece published in The Wall Street Journalwritten by former United States Attorney General William Barr and Yale Law School professor Jed Rubenfeld.

In the September 6 article, “ESG Can’t Square With Fiduciary Duty,” the Louisiana and Indiana rulings “suggest that board members of state pension funds, staff investment companies and investment advisers can be held accountable if they continue to allocate funds to ESG-promoting asset managers such as BlackRock,” argue Barr and Rubenfeld.

“Although the letters are tailored to the laws of Louisiana and Indiana, the principles they invoke are part of the common and statutory laws of nearly every state. Under these principles, social impact investing has long been considered legally problematic,” they state.

Tanya Seajay

Yet, while the ESG backlash may be gaining momentum, it may not be enough to stop the ESG phenomenon.

“What seems obvious to me is that Wall Street has to have an impact on this industry if an entire state is willing to take a stand using public retirement funds,” says Tanya Seajay, CEO of Orenda, a SIX company. which offers ESG services and sustainability scores for companies included in an investment portfolio.

“And I expect the ESG backlash to be replicated by like-minded states, countries and companies for a short time,” says Seajay. “But that’s not the trend. Corporations are being mandated globally to move away from fossil fuel financing, which means wealth is shifting towards renewables. Corresponding to this change, the company’s values ​​and expectations are for an ESG conscious future. There is a snowball effect, with no turning back.