Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.
ESG developments this week
Ballotpedia launches database of asset management companies that contract with state pensions
Today, Ballotpedia publicly launches a new database designed to help interested parties better understand the relationships between state pension funds and asset management firms. Over the course of several months last year, Ballotpedia researchers compiled the names of all asset management companies that handle state pension money and the total assets under management by each company for each state.
In light of the state-level pushback against ESG, which has focused in large part on asset managers and their management strategies, as well as the state-level pushback against the pushback, Ballotpedia saw a hole in the data available to researchers on all sides of the matter and decided to collect and publish this information. According to Ballotpedia’s Director of Research:
In 2022, Ballotpedia endeavored to collect all available data relating to the asset management of all state-run pension funds in the U.S. As a result of its research, Ballotpedia identified more than 2,100 asset management companies working for state pension plans and/or specific investment funds managed by those companies on behalf of the state pensions. Based on data availability, for some companies and some funds, the data set also contains the assets under management or the percentage of the plans’ assets managed by each asset manager.
This research was sourced primarily from year-end financial reports and investment reports released online by the state pension plans. Researchers also requested data by reaching out to plans directly, in cases where the information sought wasn’t available online.
Highlights of the data set include:
· The data set contains over 11,700 rows corresponding to asset management companies or specific funds used by state-run pension funds.
· The data set identifies over 2,100 different asset management companies currently used by state-run pensions across the U.S.
· The data set also contains source information, asset allocation details, and pension fund board information.
In the states
States send letter to asset managers opposing ESG
Attorneys general from 21 states signed and sent a letter on March 30 to some of the biggest and best-known asset management companies (AMCs) in the country. The letter threatened state divestment from AMCs that incorporate ESG policies into their investment strategies:
A coalition of 21 state attorneys general sent a stark warning to dozens of financial institutions and asset managers, warning them against pursuing woke environmental and social initiatives.
In a letter sent Thursday to 53 of the nation’s largest financial institutions, which collectively manage trillions of dollars worth of assets, the attorneys general threatened to take legal action if the firms veer from the best interests of their clients while pushing social priorities. The effort, led by Montana, Utah and Louisiana, comes ahead of proxy season during which most companies hold annual shareholder meetings where they vote on key policy initiatives.
“This ESG nonsense is filtering into a lot of our states and the way they’re doing it is really, really concerning and probably flagrantly illegal,” Montana Attorney General Austin Knudsen told Fox News Digital in an interview. “Pushing it through these asset managers and through these proxy votes is extremely concerning.”
“The message is: ‘Stay in your lane and do what you’re supposed to do. You have a fiduciary obligation under our various states laws to maximize investment. That’s your job. That’s what you’re supposed to be doing. We’re aware of state law and if it needs be, we will defend our state pensioners against anything outside that lane.'”
The letter, first obtained by Fox News Digital, stated that in recent years large asset managers, which hold majority stakes in major publicly-traded companies, have used client assets to change companies’ behavior to align with so-called environmental, social and governance (ESG) standards.
Critics—including attorneys general, state treasurers, the energy industry and consumer advocacy groups—have accused ESG-focused asset managers of sidestepping their legally-mandated fiduciary duty of looking out for the wellbeing of clients whose money they manage.
“You are … not only bound to follow the general laws discussed above but also have extensive responsibilities under both federal and state laws governing securities,” Knudsen and the other attorneys general stated in the letter. “Broadly, those laws require you to act as a fiduciary, in the best interests of your clients and exercising due care and loyalty.”
“Simply put, you are not the same as political or social activists and you should not be allowing the vast savings entrusted to you to be commandeered by activists to advance non-financial goals,” it continued. …
The letter Thursday also warned against taking certain actions promoting race and gender quotas or abortion. More than 20 abortion-related proxy measures have been proposed this year, more than every other year combined, according to the shareholder advocacy group As You Sow.
In addition to BlackRock, the letter was sent to Franklin Templeton, Goldman Sachs, HSBC, Invesco, JP Morgan, State Street and dozens of other asset managers.
Kentucky’s Democratic governor signs law opposing ESG in state investments
Kentucky Governor Andy Beshear (D) signed a law on March 24 banning ESG considerations in state investments:
Kentucky Gov. Andy Beshear, a Democrat, has signed into law a measure that requires the state’s public pension funds to make investment decisions on financial risks and returns, rather than environmental, social, and governance (ESG) factors.
Beshear signed House Bill 236 into law on March 24, mandating the state’s fiduciaries to solely consider factors that have a “direct and material connection to the financial risk or financial return of an investment,” according to the measure’s language.
It bans actions on “nonpecuniary interests,” including “environmental, social, political, or ideological interest” without a connection to the financial performance of an asset.
State Treasurer Allison Ball, a Republican, touted the new law.
“Kentucky now has the strongest anti-ESG legislation in the nation,” Just the News reported on March 28….
The state’s House passed the legislation 77-17 on March 2, and the state’s Senate approved it on March 13 on a 32-5 vote. Republicans hold supermajorities in both chambers of the state legislature.
Heritage Action for America, a grassroots conservative advocacy group, applauded the Kentucky General Assembly and Ball in a statement on March 24 for “their efforts to protect citizens from the harms of the radical ESG movement.”…
Ball, who has been the state treasurer since 2016, is currently running to be Kentucky’s next state auditor. Beshear is running for reelection as governor of Kentucky.
Indiana contracts with investment advisory firm opposed to ESG
The Indiana Capital Chronicle reported on March 20 that Indiana, which is among the states trying to limit considerations of ESG in the investment of state funds, contracted with Strive Advisory last November to help its pension system “strengthen its investment policy statement and proxy voting policies”:
Indiana’s Public Retirement System is the first known state pension system to contract with anti-ESG firm Strive Advisory, LLC and its co-founder Vivek Ramaswamy.
The contract, obtained by the Capital Chronicle, is capped at $150,000 — with conservative Republican presidential candidate Ramaswamy set to earn $4,000 per hour for ad hoc work. Industry publication Responsible Investor first reported the contract’s existence after a January public hearing.
Ramaswamy was not running for office when the contract was signed in November 2022. News reports say he has stepped down as CEO to focus on a White House bid.
The contract is part of a crackdown on environmental, social or corporate governmental-based decision-making, dubbed ESG.
“Increased scrutiny on pension fund investment and proxy voting has driven demand for proper pension oversight to an all-time high,” said a project update Strive presented at a February INPRS board meeting.
INPRS told the Capital Chronicle it wanted to “strengthen” its investment policy statement and proxy voting policies, but skeptics expressed concern. …
INPRS hired Strive to review its lengthy investment policy statement, which includes its pecuniary interest framework. That involves the system’s external asset managers, and how they make investments and vote on shares on the system’s behalf.
Strive and INPRS drafted a definition of ESG investing and overhauled several pages on non-financial investment considerations shareholder engagement, according to the February board meeting documents.
“Additional consulting services were necessary as the INPRS Board of Trustees and INPRS Staff identified opportunities to strengthen the Investment Policy Statement and applicable internal processes,” spokesman Dimitri Kyser wrote in emailed responses to the Capital Chronicle.
The contract budgets $100,000 for those services but caps total compensation at $150,000. The document says that INPRS and Strive will agree on “additional project-based fixed-cost proposals” on a “project-by-project basis.”
On Wall Street and in the private sector
BlackRock’s ESG fund loses assets amid underperformance
Shareholders have pulled assets out of BlackRock’s largest ESG fund over the last year amid its underperformance compared to other benchmarks. Green Daily, a Bloomberg newsletter, suggests the shift away from the fund could signal broader concerns related to ESG investing:
If BlackRock Inc.’s largest ESG-labeled exchange-traded fund is a bellwether for the sustainable investing industry, it’s fair to say the US sector may be in for a bumpy ride.
The assets of the iShares ESG Aware MSCI USA ETF (ticker ESGU) have dropped to $13.8 billion from a high of $25 billion as recently as a year ago. The slump occurred as shareholders pulled money from the ETF, but also as its investment performance trailed benchmark indexes, including the S&P 500, over the past two years.
A recent $4 billion withdrawal from ESGU shows “the concentration risk” that exists in this sector, said Shaheen Contractor, senior ESG strategist at Bloomberg Intelligence. Last year, roughly 22% of the net new investments in environmental, social and governance-focused ETFs went to just 10 funds, and most of the inflows were large one-off allocations from institutional investors, she said.
It’s possible these same investors might suddenly decide to reduce their stakes. The outsized impact such outflows can have raises questions about the industry’s prospects for long-term growth, Contractor said. …
While it’s possible the outflow from ESGU isn’t linked to overhanging concerns about the future of ESG investing, “the effects of concentration risk are clear,” Contractor said.
The global assets of ESG ETFs are currently at about $471 billion, down from $486 billion as recently as January, according to Bloomberg Intelligence. More recently, investors pulled almost $4.4 billion in the week ended March 17 and another $142 million in the week ended Friday, data compiled by Bloomberg show.
Another headache confronting the ESG industry is the looming downgrade by MSCI Inc. of about 31,000 funds. The research firm said it now believes the threshold required to receive a top rating of AA or AAA “should be more rigorous and ambitious.” …
And then there are performance concerns. Many ESG funds have been trailing market benchmarks since the US Federal Reserve started increasing interest rates last March, prompting equity investors to favor “value” stocks like oil and gas producers over “growth” stocks such as technology companies.
Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, contends Fed Chairman Jerome Powell “has done more to damage ESG than Florida Governor Ron DeSantis could ever dream of,” adding that “the political stuff is secondary to what’s happened to rates and the simple fact is many funds are currently underperforming.”
It’s not only ESGU that’s trailing the broader market. The $5.9 billion Vanguard ESG US Stock ETF (ESGV) has declined 1.8% during the past two years, compared with the 4.9% advance of the S&P 500 in the same period.
This year, the average ESG-focused fund in the US rose 1.2% as of Friday, lagging behind the S&P 500’s 3.8% advance and the 3.6% return of the Russell 1000 in the same period, according to Bloomberg data.