Anti-ESG model policies ‘increase liability risk’ for pension fiduciaries

Two anti-ESG model policies by right-wing lobby group American Legislative Exchange Council (ALEC) can create “massive legal risk” for any pension fiduciary or service provider, according to a research paper. 

The study, titled The Liability Trap: Why the ALEC Anti-ESG Bills Create a Legal Quagmire for Fiduciaries Connected with Public Pensions, was authored by David J Berger, a partner at Wilson Sonsini Goodrich & Rosati PC; Beth Young, managing partner at consultancy Corporate Governance and Sustainable Strategies; and David H Webber, a professor of law at Boston University. 

The trio analysed ALEC’s State Government Employee Retirement Protection Act, which would stop public pensions from designing “politically motivated” investment strategies. According to the report, as of December 2022, only “stripped down” versions of this have thus far been introduced in two states. 

The second model policy assessed was ALEC’s Eliminate Economic Boycotts Act, which would prohibit governmental entities from doing business with firms that are deemed “economic boycotters” of industries like fossil fuels and firearms. 

As of December 2022, according to the study, bills patterned on it or on an earlier version have been adopted in five states, including Texas, and introduced in 10 others. The report acknowledged that in January, ALEC’s board voted for the policy to be reviewed and it “is therefore possible that ALEC will end up approving a model bill that differs from the one we discuss or not approving any bill based on the boycott concept”. 

Upon assessing the two model policies, the report claims they “dramatically increase liability risk for plan fiduciaries and service providers without providing any corresponding or even offsetting benefits to fiduciaries or their members”. 

It continued that the two policies would “reduce the number of service providers willing to work with such pensions, increase liability, insurance and investment costs for taxpayers, and fund participants and beneficiaries. They should be rejected.” 

According to ALEC, model bills were introduced 2,900 times across the states and in Congress, with more than 600 becoming law between 2010 and 2018.

Among the alleged legal problems, the paper points to the State Government Employee Retirement Protection Act’s attempt to impose an “unworkable distinction” between so-called pecuniary and non-pecuniary factors in an investment “that was already rejected by the US Department of Labor following widespread outcry from the investment community”. 

In November, the DoL introduced its new Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule, which reversed Trump-era barriers to workplace schemes considering ESG in their investments and voting.

Rules laid down during Trump’s presidency, which came into effect in January 2021, required workplace pension schemes to solely consider financial factors when selecting investment funds or voting proxies.

But following consultation, the DoL concluded that they “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially”.

Returning to the report, it also pointed to a clash between the definition of financial materiality as articulated in ALEC’s Act and that established by the Supreme Court of the United States, which could result in the contradictory outcome, “such that state law would bar consideration of investment information that federal law requires”. 

Researchers suggest that the broad definition of “boycott” as used in the Boycott Act could force asset managers and service providers to “choose between doing business in a state that has passed the bill and satisfying their fiduciary and contractual obligations”.

ICCR pushes back on DOL challenge 

On the recent DoL ruling, the US-based non-profit Interfaith Center on Corporate Responsibility (ICCR) wrote to members of Congress earlier this week, calling on them to vote against legislation put forward by Republicans seeking to overturn the new rule, the so-called Congressional Review Act (CRA). 

“The DoL rule does not require that pension plans consider ESG, but simply acknowledges that ESG factors like climate change can be relevant to investment returns and, therefore, may be considered,” said the letter. “In other words, the rule takes a neutral stance on the consideration of ESG criteria and does not mandate its use, as proponents of the CRA Rule repeal suggest.” 

Anti-ESG push stutters

The backlash against ESG in the US has run into a series of hurdles from public pension funds of late. 

At a special meeting earlier this month, the board of trustees of the $20 billion Kentucky County Employees Retirement System (Kentucky CERS) voted to approve a letter to state treasurer Allison Ball advising that the pension fund would not divest from any of the 11 financial institutions deemed by her office to be boycotting energy companies. 

And in Indiana, the $37 billion Public Retirement System warned in a fiscal impact statement that a proposed bill with similar requirements on divesting and ending business relationships with fossil fuel “boycotters” could cause a significant reduction in investment returns, estimated at $6.7 billion. 

On the other side of the debate, however, three Republican policymakers sent a letter to Securities and Exchange Commission chair Gary Gensler demanding records and other information related to the regulator’s proposed climate disclosure rule, including responses to previous requests by numerous members of both the House and the Senate “that chair Gensler has failed to provide”.

According to the letter, the SEC’s proposed rule “exceeds the SEC’s mission, expertise and authority and – if finalised in any form – will unnecessarily harm consumers, workers and the US economy”.