The backlash against ESG in the US has hit a series of hurdles, with pension funds pushing back against legislation in two states and criticism of the movement coming from a Republican governor and a North Dakota public official.
At a special meeting last week, 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.
BlackRock, Citi and JP Morgan all found themselves on the list, which was published at the start of January. It followed similar moves by Texas and West Virginia to ban funds from investing in financial companies alleged to be boycotting fossil fuels.
Trustees at the Kentucky CERS meeting voiced concerns about the cost of ending contracts with current managers and finding new ones, and the risk that exclusions could introduce tracking error.
Fund CEO Ed Owens also noted that there was no guarantee that new managers found by the fund would stay off future iterations of the list, raising the risk of repeated costs.
In addition, it was flagged that BlackRock alone manages 30 percent of the funds’ non-US equity portfolio and that unwinding the relationship could prove complicated.
Michael Foster, a lawyer and fund trustee, said he “would say [divestment] is a political statement”.
“We live within a political world and I understand that, but I’m not looking at this for a political statement,” he added. “I’m looking at it in terms of fulfilling our fiduciary responsibilities in the best way we can, and I don’t want to be limited from investing in these companies or similar companies if they best serve our retirement system.”
The motion to approve the letter was passed without dissent.
David Eager, executive director of the fund, said he had been in contact with Beau Barnes, general counsel at the $26 billion Kentucky Teachers’ Retirement System, and that the fund was “of a like mind – they kind of have an identical position on this”. TRS did not respond to a request for comment. A similar letter is also under consideration by the State Employees Retirement System.
Kentucky officials have already seen strong pushback against anti-ESG measures.
In November, the state’s bank association announced plans to sue the attorney general for allegedly exceeding his authority and violating first amendment rights by issuing six subpoenas and civil investigative demands to Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo in respect of anti-ESG legislation passed in 2021.
In response, the Kentucky attorney general – Daniel Cameron – filed a motion for the lawsuit to be dismissed.
At the national level, in January, the American Legislative Exchange Council (ALEC) voted to send a model bill requiring states to stop doing business with companies considered to be boycotting fossil fuels and other related industries back to the group’s energy task force for additional review.
ALEC made the move following advocacy by the American Bankers’ Association, state bankers’ associations and others, which argued that it “undermined the organisation’s own commitment to free markets and limited government”.
Incident in Indiana
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.
The pension fund suggested that the bill could result in a reduced aggregated investment return of $6.4 billion for its defined benefit funds and $300 million for its defined contribution funds over the next 10 years.
It argued that provisions in the bill could effectively prohibit investments in private markets, as well as the use of active managers for its investments, which could also conflict with its legal obligation to provide a Stable Value Fund for its DC scheme. The Stable Value Fund is currently actively managed. Ensuring compliance with provisions on proxy voting could increase administrative costs by $550,000 a year.
Large decreases in investment earnings, the fund continued, would result in an increased unfunded liability for the DB funds, which would require a “significant increase” in employer and state contributions to the fund.
Concerns about the impact of anti-ESG bills on state financing were raised in one study looking at Texas and a second that examined Kentucky, Florida, Louisiana, Oklahoma, Missouri and West Virginia.
Business leaders have also started sounding the alarm.
Ginger Chinn, vice-president of government policy and public affairs at the Salt Lake Chamber, a business association in Utah, told Fast Company: “We don’t want what happened in Texas to happen here.”
She continued: “I think the state feels like they’re protecting our businesses, but many businesses say this actually limits choices. We absolutely oppose federal overreach and support free market forces. Businesses in Utah have already done ESG without federal mandates. If the legislation goes too far, companies may not have the option to do things that they know are best for their business.”
Fellow Republican politicians have also started questioning the rationale for too much government intervention on how businesses operate.
In a January interview with CNN, New Hampshire governor Chris Sununu said that although “wokeness” needs to be tackled in America, “it’s not up for the government to come in and punish a business or penalise a business”.
“Now you’re setting a precedent for Democrats to come in. And when they take the reins of leadership to penalise a business for being too conservative, that’s crossing a very, very slippery slope.”
He added: “If people don’t like what Disney is doing, they’re going to stop going to Disney. If people don’t like what Blackrock or Bank of America is doing, they’re going to stop utilising those types of services. Let the free market reign.”
Meanwhile, in North Dakota an anti-ESG bill was stonewalled as 90 lawmakers voted against the proposal with just three voting in favour.
Lise Kruse, commissioner of the North Dakota Department of Financial Institutions, said in January: “We expect banks to have strong risk management principles in place, but we do not go as far as dictating a bank’s business strategy or what particular niche they decide to pursue expertise in. If a bank decides to serve certain customers and industries, as long as it is done in a safe and sound manner, that is a business decision that we agree government should not be involved in.”
Kruse also said the bill was too vague regarding the definitions of financial institutions and did not provide ample due process. She noted that the treasurer would simply need to receive a complaint about a financial institution.
“Relying on a one-sided notification, without an appeal right or due process, allows for the possibility of wrongful determinations,” she said.