Economy and Society, April 11, 2023: Tennessee joins open letter opposing ESG

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

In the states

SFOF CEO pushes back on ESG 

Derek Kreifels, the CEO of the State Financial Officers Foundation (SFOF), appeared on Fox News’s “Fox & Friends” on April 9 to discuss the state financial officers who are pushing back against ESG. Kreifels argued asset managers have a fiduciary responsibility to consider only financial factors—not ESG criteria—in their investments on behalf of states.

Watch the video here.

Tennessee joins open letter opposing ESG

In last week’s newsletter, we reported that 19 state attorneys general had signed an open letter to asset managers arguing that those managers have a legal responsibility to seek maximized returns based on financial (not ESG) considerations in the investment of state funds. Tennessee joined the original group on April 10, bringing the number of states that are part of the coalition to 20:

Tennessee Attorney General Jonathan Skrmetti joined a coalition of 20 state attorneys general in warning more than 50 of the nation’s largest asset managers about Environmental, Social, and Governance investments being made with Americans’ money as annual shareholders’ meetings begin for many public companies.

The letter was sent to 53 asset managers with $40 billion or more in assets; the attorneys general cite concerns that asset managers may be pushing the political goals of Climate Action 100+ and the Net Zero Asset Managers Initiative rather than acting in the best fiduciary interests of their clients, which is their legal obligation.

“We are writing this open letter to asset manager industry participants to raise our concerns about the ongoing agreements between asset managers to use Americans’ savings to push political goals during the upcoming proxy season,” the coalition wrote. “As explained further below, asset managers have committed to use client assets to change portfolio company behavior so that it aligns with the Environmental, Social, and Governance goal of achieving net zero by 2050. This specific, political commitment changes the terms of the products offered, as well as engagements with individual companies.”

In addition, the coalition notes that during the 2023 proxy season, asset managers will need “to choose between their legal duties to focus on financial return, and the policy goals of ESG activists” as banks, insurers, and utility and energy companies are all facing proposals from climate activists affiliated with organizations asset managers may have joined. Additionally, abortion and political spending and race and gender quotas may also be included in numerous proposals this year but are not financially justified – and ESG aims themselves are not valid defenses. …

General Skrmetti signed onto the letter in addition to state attorneys general from Alabama, Arkansas, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, New Hampshire, Ohio, South Carolina, Texas, Virginia, West Virginia, and Wyoming. The effort was led by Montana Attorney General Austin Knudsen, Louisiana Attorney General Jeff Landry, and Utah Attorney General Sean Reyes.

Kansas bill opposing ESG passes legislature

Kansas lawmakers approved a bill on April 6 prohibiting ESG considerations in public pension investments. Some measures that were proposed, like certain restrictions on private ESG investing and on public investments in foreign companies, did not make it into the final bill. The bill was sent to the governor for consideration:

A proposal designed to thwart investing that considers environmental, social and governance factors has cleared the Kansas Legislature, but divisions within its GOP majorities kept the measure from being as strong as some conservatives wanted.

Lawmakers on Thursday approved a bill that would prevent the state, its pension fund for teachers and government workers and its cities, counties and local school districts from using ESG principles in investing their funds or in awarding contracts. Such investment strategies have become the target of GOP lawmakers across the country who argue they are focused more on pushing political agendas rather than earning the best returns.

At least seven states, including Oklahoma, Texas and West Virginia, have enacted anti-ESG laws in the past two years. GOP Govs. Ron DeSantis of Florida and Greg Gianforte of Montana also have moved to ensure their states’ funds aren’t invested using ESG principles. …

Some conservative lawmakers in Kansas wanted to require managers of private funds to either disclose to clients that ESG principles guide their investing or to get clients’ written consent to use ESG. Republican state senators backed a plan to force the state pension fund to divest from nations identified by the U.S. government as foreign adversaries, including China.

But proposals to impose new rules for private money managers spurred a strong backlash from influential business and banking groups. House members said the provision requiring the pension fund to divest from other nations was written so broadly that it would prevent investing in companies founded by immigrants fleeing oppression. …

The votes to approve the bill were 76-47 in the House and 27-12 in the Senate and sent the measure to Democratic Gov. Laura Kelly. While almost all of the state’s Democratic lawmakers voted “no,” Kelly has not said what she will do. Supporters had the two-thirds majority needed to override a veto in the Senate, but not in the House.

Anti-ESG bill advances out of Indiana Senate committee 

The Indiana Senate Pensions and Labor Committee advanced a bill April 5 that proposes prohibiting ESG considerations in public investments. The Senate bill contains several exemptions that did not appear in the bill when it was first introduced. Some have suggested the changes would water down the legislation:

A bill designed to prevent the state’s pension fund from working with asset managers that use environmental, social and governmental—or ESG—considerations in their investment strategies was advanced by the Indiana Senate Pensions and Labor Committee on Wednesday.

As it was originally written, House Bill 1008, authored by Rep. Ethan Manning, R-Logansport, was projected to result in a whopping $6.7 billion loss to the Indiana Public Retirement System, or INPRS, over the next decade. That number was based on the assumption that financial institutions would not be able to work with INPRS due to its hardline stance against ESG investing, according to State Treasurer Daniel Elliot.

That prompted lawmakers to make significant changes to the bill, including exempting private market funds, which make up about 15% of the state’s total pension investments, from the legislation. The amended bill also excludes the state police pension trust and the pension system’s defined contribution plans.

Manning said the revisions would reduce the fiscal impact to zero and clear up any confusion while keeping intact the original intent of the legislation.

“The big idea here is that financial returns trump all, period, full stop,” Manning told the committee. “That’s the point of the bill. You can do all of the ESG funds and investing you want, but they have to have the highest returns, lowest risk and lowest management fees.”

The legislation also imposes reporting requirements on INPRS, requiring the agency to provide an annual count of all proxy votes made by fiduciaries.

Enforcement of the law would fall under the treasurer’s office, which some lawmakers found problematic.

The committee advanced the bill with all three Democrats on the committee voting against the measure. The legislation heads to the Senate floor.

Wyoming secretary of state joins ESG pushback

During a meeting of the State Loans and Investments Board on April 6, Wyoming Secretary of State Chuck Gray (R) said he opposes ESG and will do whatever he can, given his position, to oppose it:

Secretary of State Chuck Gray left no doubt about where he stands on ESG policies during a State Loans and Investments Board (SLIB) meeting on Thursday morning, saying he won’t tolerate them. He quizzed financial advisors trying to get a contract with the State of Wyoming to help manage the state’s investments.

ESG, also called “woke capitalism” by critics, rates funds on various markers of progressive-friendly policies related to protecting the environment, diversity in the workplace and community relations.  

Gray mentioned early testimony given by a handful of University of Wyoming students who said there are new investment opportunities opening up in fields that ESG-friendly investors have shunned. 

“There’s this enormous opportunity in oil and gas created by, if you will, this clown show woke ideology that is out there, this ESG deal,” Gray said. 

Gray grilled Kevin Alexander, a partner with private credit investment firm Ares Management, about whether he’s opposed to ESG-driven investing and how he plans to take advantage of new competitive opportunities opened by the ideological-driven investing.  

Ares staff came before SLIB on Thursday seeking an approval to enter into a contract with the state to manage $100 million of its investments. 

“We’re fundamentally investors in cash-flows,” Alexander answered Gray. “Our view of ESG is, we want to provide a risk adjusted return on a predictable, contractual cash-flow. We do not have any limitations with respect to our investing that are guided from an ESG perspective.” …

State Treasurer Curt Meier did not ask any questions about ESG and described Ares staff as “a good group of capitalists.” He has spoken against ESG investing in the past, but like Gordon, espoused a commitment to investing in what provides the state the highest rate of return.  

The topic of managing the state’s investments falls more in the purview of Meier’s department than Gray’s on a day-to-day basis.  The secretary of state oversees the state’s business filings. But every member of SLIB gets a say in how the state’s investments are handled. 

The state’s current Investment Policy Statement (IPS) doesn’t mention ESG or provide any guidelines to fund managers as to whether or not they can invest in funds supportive of ESG policies.

On Wall Street and in the private sector

ESG sector suffers losses to end Q1

The ESG sector, which has underperformed many indexes and benchmarks over the last year in the midst of broad market declines and the rise of energy assets, looked to rebound in the first quarter of 2023 but was undone at the end of the quarter, in part because of its exposure to banks and other financial services companies:

Investment funds with environmental, social and governance (ESG) goals appear to be back in vogue in 2023, although the banking crisis that roiled markets last month removed some of the shine as investors withdrew cash towards the end of the quarter.

The previously booming ESG investment industry experienced a rough 2022, as soaring energy prices and a surge in global inflation eroded confidence in sustainable investing for some.

Before concerns over the health of banks sparked an investor rush to safety, funds marketing themselves as ESG-friendly had a strong start to 2023, with investors adding in more cash than they withdrew, according to Refinitiv Lipper data.

Across ESG debt, equity and multi-asset funds, net inflows hit $25.5 billion, the best quarter since early 2022, the data shows.

Still, with markets suffering another volatile spell and equity prices far below their peaks, total assets under management across all ESG funds stood at $33.3 trillion at end-March, versus a peak of $51.7 trillion at end-December 2021, according to the Refinitiv Lipper data. …

Analysts say ESG funds have been helped by a rebound in technology stocks that many funds hold, and policy initiatives such as the U.S. Inflation Reduction Act, which support the case for buying stocks that could benefit from a lower-carbon economy.