Proxy voting and engagement are emerging as a key battleground for US state officials leading the charge against ESG investing.
“Most of [our] concerns with ESG are related to the activism of asset managers after investments have already been made, not with the initial risk assessment or decision on whether or not to make an investment,” a spokesperson for Missouri Treasurer Scott Fitzpatrick told Responsible Investor.
The comments came in the context of a new anti-ESG campaign launched in the US this month by the State Financial Officers Foundation (SFOF), of which Fitzpatrick is a member.
Dubbed “Our Money, Our Values”, the website claims to help Americans “understand how fund managers are using their pension dollars for their own selfish political purpose”.
As part of the campaign, individuals and businesses are encouraged to provide feedback to SFOF on “how ESG has impacted your business or family”. The website also provides suggested questions for investors to ask their asset managers regarding their ESG.
In the spirit of transparency, RI reached out to 20 out of the 21 treasurers – or equivalent members – of SFOF to answer questions about their own relationship with ESG. (RI was unable to contact the Louisiana State Treasurer’s office.)
We asked what they define as an ESG investment, what they are asking their investment managers about ESG, and whether they could confirm that none of their investments are managed using ESG analysis or ESG as a risk assessment tool.
At the time of publication, seven Treasurers had responded to RI’s inquiry – and within the group there seems to be varying approaches and understanding of what ESG means.
Asset manager ‘activism’
The most detailed response came from Missouri, where Fitzpatrick’s office flagged his concerns with asset manager “activism”.
Asked for an example, the Treasurer’s spokesperson pointed to votes for shareholder proposals at Apple and Chevron by BlackRock, which has emerged as one of the key targets for the anti-ESG movement.
At Apple, BlackRock voted for a third-party audit of the impact of the company’s policies on the civil rights of their stakeholders. Fitzpatrick’s spokesperson said this would require an expenditure of company resources “while there is no evidence it would create value for shareholders”.
Similarly, they condemned BlackRock’s decision to vote for a proposal asking Chevron to reduce its Scope 3 emissions, “against the recommendation of the board of directors”. “This would make Chevron accountable for the emissions of other unrelated entities over which they exercise no control, would be very costly and do nothing to advance the interest of shareholders,” the spokesperson said.
In its most recent stewardship report, BlackRock said it engages and votes in the long-term economic interests of clients. “Guidelines are applied pragmatically, and on a case-by-case basis with the goal of voting to achieve an outcome most aligned with the long-term economic interests of our clients as shareholders.”
On energy transition, the report states: “While we encourage companies to disclose their Scope 3 emissions and targets where material to their business model, we do not consider such Scope 3 disclosures and commitments essential to our support for directors.”
‘ESG in action’
Both of the BlackRock votes are flagged by SFOF on the Our Values, Our Money website as examples of “ESG in Action”. The other two listed are “BlackRock pushes ESG in America while investing in China” and Morningstar subsidiary Sustainalytics allegedly applying “ESG criteria in a way that advances the boycott, divestment, and sanctions (BDS) movement against Israel”.
Morningstar has been under fire since 2020 over Sustainalytics’s alleged support for the BDS movement. A report by White & Case, commissioned by the service provider, found “no evidence” that Sustainalytics products recommended or encouraged divestment from Israel. Some concerns were raised about Morningstar’s Human Rights Radar, which was promptly shuttered. The firm also announced this month that Sustainalytics would no longer draw on UN Human Rights Council data in its research products as part of efforts to tackle “anti-Israel bias concerns”.
Another area of concern raised by Fitzpatrick’s office was that many investment products “that are not identified by managers as being ESG products, including passively managed index funds, are being managed with ESG-linked proxy voting and stewardship strategies, which is inappropriate”.
“It feels like certain industry participants are trying to make all investments ‘ESG investments’,” the spokesperson said.
Proxy voting was also raised by Arizona Treasurer Kimberly Yee’s office in its response to RI.
A spokesperson pointed to state’s Investment Policy Statement (IPS), which was adopted at the end of August. This states that shares “may only be voted in the pecuniary interest of the endowments and may not be voted to further non-pecuniary, environmental, social, political, ideological or other benefits or goals”.
It continues: “The Treasurer’s office may not grant proxy voting authority to any person who is not a part of the Treasurer’s office unless that person follows guidelines consistent with this investment policy to act based only on pecuniary factors.”
RI asked Yee’s office whether she would agree that some ESG issues are financially material, whether she has a position on the ESG approach of underlying investee companies in the portfolio, and whether she would reconsider her stance if evidence showed that funds managed in line with ESG principles perform better than those without.
At the time of publication, the Treasurer’s office had not responded to the additional questions.
In North Dakota, state Treasurer Thomas Beadle told RI – in reference to the SFOF campaign – that he supported everyday citizens asking questions of their investment advisers or sharing stories about how they have been impacted.
“North Dakota is an ag and energy state that helps feed and fuel the world, and we have numerous businesses that have struggled to access capital as a result of these initiatives,” he said. “People should be informed about where their money is being invested in and try to understand the risk/reward involved with those investment decisions.”
Beadle noted that the state prohibits making “social investments”, which are defined as “consideration of socially responsible criteria in the investment or commitment of funds for the purpose of obtaining an effect other than a maximised return to the state”.
He noted that, while his office deals almost exclusively with the state-owned Bank of North Dakota, the prohibition affects the State Investment Board and the public funds that are managed at the Retirement and Investment Office.
Meanwhile in South Carolina, the office of Treasurer Curtis Loftis also took aim at BlackRock. The state has recently finalised its divestment from the asset manager due to its “increasing focus on promoting progressive environmental, social and governance (ESG) factors as part of its investment strategies”.
At the time, Loftis said those actions against BlackRock were “just one step in protecting South Carolina’s financial interests from self-serving outsiders who have no stake in the wellbeing of taxpayers or public retirees”.
Perhaps surprisingly, however, some SFOF treasurers do not have a strong stance on ESG.
A spokesperson for Wyoming State Treasurer Curtis E Meier pointed to a policy stating that the office is ESG agnostic. “That is to say, our Investment Policy Statement (IPS) is silent on the matter.”
The IPS is set by the State Loan and Investment Board (SLIB), and the Treasurer’s Office follows the direction of the SLIB. Any change to the IPS would need to be initiated by the SLIB.
“If the State were to divest itself from or invest with every manager based on its stance on fossil fuels, our returns would likely take a substantial hit. As fiduciaries of these funds, making decisions dictated by social groups or governmental regulations or questionable inconclusive data that have no relationship to investment returns does not lead to the desired outcome of the highest risk adjusted return for Wyoming’s citizens,” the document concluded.
And North Carolina Treasurer’s office told RI: “We appreciate your interest in the NC Department of State Treasurer. The Department does not have any specific ESG mandates, nor does it maintain an ESG policy.”
Later this week, RI will be publishing a follow-up piece with investor initiatives’ responses to the SFOF campaign, as well as how – in light of the midterm results – the backlash against the anti-ESG push is ramping up