A divided approach to ESG

States across the nation continue to be divided in their approach to so-called environmental, social, and governance issues – which is creating an ongoing problem for state retirees and taxpayers.

In Oklahoma, for example, lawmakers are grappling amongst themselves on how to manage their ESG blacklist bill, which is currently blocked by the courts in the state after a judge ruled that it violated the state’s constitution. One bill in the legislature that is heading to the Senate floor seeks to move the enforcement of the blocked Energy Discrimination Elimination Act away from the state treasurer to the attorney general’s office. Another bill, House Bill 2043, would exempt local governments from the law. However, neither bill seems to address the underlying issues which led the state court to block the law in the first place.

A few states over, Indiana is doubling down on how they apply their anti-ESG law, unfortunately putting politics ahead of common sense.

Like their counterparts in other states, Indiana lawmakers passed a law prohibiting the Indiana Public Retirement System (INPRS) from contracting with investment firms alleged to have made so-called “ESG commitments.” As a result, Indiana has so far placed just one company, BlackRock, on the state’s watchlist over concerns regarding ESG commitments the company is alleged to have made. Now, they fired that company and replaced it with a different investment manager that in many ways appears to have even stronger ties to the ESG issues that the Hoosier lawmakers were attempting to restrain in the first place.

State Street Global Advisors was chosen by Indiana’s state pension to manage $969 million in bond portfolios under their $44.7 billion state pension plan. But according to a report released by the group ShareAction, State Street is ranked significantly higher in support for ESG voting than BlackRock. In their report, ShareAction ranked State Street 13% and 7% for their support of environmental and social votes, respectively; in comparison, BlackRock was ranked 4% for both. Replacing one asset manager that has been performing well simply because of the Treasurer’s political concerns with a similar firm that actually votes for more ESG items shows that politics are playing an outsized role in how investment decisions at the pension fund are being made. These sorts of unnecessary and blatant political decisions, which come with transition costs, only serve to harm the state’s pensioners and taxpayers, and actually accomplish little in the so-called battle against ESG.

When the Indiana legislature first considered this bill, it came with a hefty price tag of $6.7 billion in potential cuts to public pension returns. While subsequent versions of the legislation lowered the cost, it didn’t eliminate the risk or costs to the state. There are always switching costs and current market risks to consider when switching managers of such a large portfolio. This switch in the name of ESG is mystifying when you look and see that State Street, selected to avoid the issues of ESG in the state, actually openly highlights their support of environmental shareholder proposals and climate-related engagements as recently as 2023.

As APSR has pointed out before, anti-ESG blacklists are not only bad for pensioners, they’re bad for state economies. In states with blacklists, shutting out what they consider “pro-ESG” banks or investment advisers weakens competition for public finance business, cut some of the best practitioners out of the running for business, created obstacles for public projects and economic development, raised prices for taxpayers, and lowered returns. Arbitrarily determining which firms pass a certain state’s litmus test is not a sound approach to managing finances on behalf of taxpayers and retirees alike.

Elected officials across all states should keep this in mind as anti-ESG bills move in different directions across the country.