June 27, 2022

The Nerve

Where Government Gets Exposed

Critics fear ESG factors could diminish state pension investments

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By RICK BRUNDRETT

Two major investment management firms that handle a large chunk of South Carolina’s pension plan for state retirees are big proponents of the controversial environmental, social and governance (ESG) movement, The Nerve found in a review of pension and other records.

Of the approximately $39 billion market value of all investments by the pension plan at the end of last fiscal year, about $18.5 billion, or nearly half of the total, was managed by two of the world’s largest asset managers – New York-based BlackRock and Boston-based State Street Corporation, pension records show.

BlackRock – the world’s largest asset manager overseeing $10 trillion in assets as of January – and State Street, which reported $4 trillion in assets under its management at the end of last year – make no secret of their support of the ESG movement, also known as “stakeholder capitalism.”

Critics say ESG scores are being used by banks, investment and accounting firms, and credit rating agencies to grade companies on how well they have adopted certain liberal values or policies, such as reducing the effects of climate change, increasing diversity on their governing boards, and supporting social justice causes.

When it comes to public pension plans, ESG critics contend that investment management companies could substitute ESG factors for traditional financial considerations, resulting in investments having lower rates of return and plans being underfunded.

In his annual letter this year to CEOs, Larry Fink, who is the chairman and CEO of BlackRock, asked that businesses “demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies.”

“Most stakeholders – from shareholders, to employees, to customers, to communities, and regulators – now expect companies to play a role in decarbonizing the global economy,” Fink wrote, adding later. “Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?”

Still, Fink contended in his Jan. 17 letter that “stakeholder capitalism” is “not about politics” or a “social or ideological agenda,” adding, “It is not ‘woke.’”

On its website, State Street Global Advisors, a division of State Street Corporation, says it believes that companies that “successfully integrate ESG into their business strategies and have effective independent board oversight are better positioned to generate value for our clients over the long term.”

“At State Street Global Advisors our mission is to invest responsibly to enable economic prosperity and social progress,” the website says.

As of last June 30 for South Carolina’s pension plan, State Street and BlackRock were managing publicly traded stocks totaling about $4.9 billion and $13.6 billion in market value, respectively, according to an annual report by the S.C. Retirement System Investment Commission (RSIC). The collective $18.49 billion market value of those stocks represented 47.2% of the total $39.15 billion market value, net of benefit payments, of the pension plan’s overall investments.

BlackRock and State Street were the only investment management firms involved with the public equity portfolio of the pension plan for fiscal 2020-21, according to the RSIC report.

Asked for the number of public pension plans in the U.S. that BlackRock is involved with, Keith Brainard, a spokesman for the Kentucky-based National Association of State Retirement Administrators, said in an email response to The Nerve, “It seems safe to say that as the world’s largest asset manager, BlackRock is likely under contract with a large number of public pension funds and public pension plan sponsors (states and cities), for both pension and defined contribution assets.”

There are about 5,000 public retirement systems in the U.S., Brainard said, citing U.S. Census Bureau records.

An average total of 171,298 retirees in South Carolina’s five retirement systems or their beneficiaries received pension benefits last fiscal year, according to an annual report by the S.C. Public Employee Benefit Authority.

Standing up and fighting back’

Some S.C. officials are concerned that ESG factors could become a consideration in state pension plan investments, the overall management of which is the responsibility of the RSIC.

“My view would be very disapproving of basing investment decisions for investment portfolios on anything other than economic reasons,” state comptroller general Richard Eckstrom, a Republican, told The Nerve. “ESG considerations fall into the political category.”

Said Republican state treasurer Curtis Loftis when contacted by The Nerve: “I think they’ve (the RSIC) done a fine job so far; they’ve resisted a lot of the pressure. However, they along with Treasurer’s Office, the attorney general and anybody else who can has got to start standing up and fighting back. If we don’t fight back, we’re going to have nothing left.”

Under state law, Loftis and Eckstrom each appoints a member to the RSIC’s governing board, which has seven voting members.

Loftis’ counterpart in West Virginia – Republican state treasurer Riley Moore – announced in January that the state Board of Treasury Investments, which manages the state’s approximately $8 billion in operating funds, would no longer use a BlackRock investment fund as part of its banking transactions.

“The decision was based on recent reports that BlackRock has urged companies to embrace ‘net zero’ investment strategies that would harm the coal, oil and natural gas industries, while increasing investments in Chinese companies that subvert national interests and damage West Virginia’s manufacturing base and job market,” the written announcement said.

In an April 19 letter to RSIC CEO Michael Hitchcock, Alan Wilson, who is the S.C. attorney general, said he and other state attorneys general recently sent letters to the Biden administration to “express concern over new federal rules regarding Environmental, Social, and Governance (‘ESG’) investment practices.”

“As I have expressed in these letters to the Biden administration, I have grave concerns over ESG investment practices,” Wilson, a Republican, said in the letter, a copy of which was provided to The Nerve by the Attorney General’s Office. “I seriously question whether these investment practices are consistent with fiduciary obligations under federal and state law.”

“Additionally,” continued Wilson, who by law is the state’s securities commissioner, “I am concerned that proponents of ESG investments frequently misrepresent and misstate both the nature and benefits of those investments.”

In a recent interview with The Nerve, Hitchcock said while there are state pension plans “interested in pursuing ESG-related investment theses, that’s not us.”

Hitchcock said neither BlackRock nor State Street makes “any investment decisions for us whatsoever,” explaining that the pension plan’s public-equity portfolio is “all passively invested” through an index, which is a way to measure the price performance of a group of securities over time.

Generally, passive investing refers to a “buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market,” and unlike active trading, doesn’t seek to “profit from short-term price fluctuations or market timing,” according to Investopedia, a financial information website.

“The reason we invest passively is that we’re 50-year investors,” Hitchcock said, noting the pension plan’s public-equity portfolio is “spread across the world.”

Annual fees paid by the RSIC to BlackRock and State Street total about $3.5 million, he said.

Asked if ESG factors play any role in BlackRock’s or State Street’s management of their part of the pension plan, Hitchcock replied, “No, it’s just an index. … Even if they didn’t like a company, they wouldn’t be able to exclude that company because for some reason they didn’t like them.”

“The way we look at it, it’s our job to earn a return to help make the (pension) plan work,” he said. “What we’re trying to do is earn that 7% actuarial rate of return in the best risk-adjusted way possible.”

Still, Hitchcock acknowledged that the ESG movement is “very much a trend in the institutional investor community,” and that he “completely understands” the concerns raised by the state attorney general.

“I told the AG we don’t invest to promote progressive causes; we don’t invest to promote conservative causes,” Hitchcock said about a letter he wrote in response to Wilson’s letter last month. “We invest to benefit our beneficiaries, and that’s the end of the story.”

“RSIC’s position is that promoting ESG initiatives, or any other type of non-pecuniary goal, must not be a primary investment consideration,” Hitchcock said in his April 26 letter to Wilson, a copy of which Hitchcock provided to The Nerve.

Legislative proposals

Longtime state Rep. Garry Smith, R-Greenville, who is retiring this year, told The Nerve he hopes an ESG bill will be introduced next year similar to a national model proposed by the Virginia-based American Legislative Exchange Council (ALEC), which on its website describes itself as “America’s largest nonpartisan organization of state legislators dedicated to the principles of limited government, free markets and federalism.”

The proposed legislation by ALEC would strengthen fiduciary rules to “protect pensioners from politically driven investment strategies” that “reduce investment returns over the long term which leads to underfunding in state pension plans across the country,” according to a summary of the model, titled the “State Government Employee Retirement Protection Act.”

Smith, who is ALEC’s state chairman for South Carolina, said he opposes injecting ESG factors into state pension plan investments.

“What you’re doing is instilling politics, climate change and other things in the decision making, which is absurd,” he said.

Smith said an ESG-related bill introduced in February by Rep. Anne Thayer, R-Anderson, and co-sponsored by more than 30 Republicans, including Smith, could be expanded next year to ban ESG factors in pension plan investments.

The bill, which The Nerve reported about in April and didn’t pass during this year’s regular legislative session that ended last week, would have prohibited financial institutions doing business in the state from discriminatory practices based on ESG ratings or other “subjective or arbitrary standards.”

“I say this all the time: Ideas have consequences, and bad ideas have victims,” Smith said. “These (ESG) ideas have victims – lots of victims.”

Brundrett is the news editor of The Nerve (www.thenerve.org). Contact him at 803-3948273 or rick@thenerve.org. Follow him on Twitter @RickBrundrett. Follow The Nerve on Facebook and Twitter @thenervesc.

Nerve stories are free to reprint and repost with permission by and credit to The Nerve.

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