January 30, 2023

The Nerve

Where Government Gets Exposed

Lawmaker wants ESG factors banned in state pension investments

By RICK BRUNDRETT

State retirement funds could not be invested based on controversial environmental, social or governance (ESG) factors, under a House bill filed for the new legislative session that starts next week.

The Nerve in May revealed that two major investment firms that manage a substantial share of South Carolina’s pension plan – New York-based  BlackRock and Boston-based State Street Corporation – are big supporters of the ESG movement.

As of fiscal year 2021, about $18.5 billion of the approximately $39 billion market value of all investments by the pension plan was managed by BlackRock and State Street, pension records show. The state Retirement System Investment Commission’s annual investment report for last fiscal year, which ended June 30, has not yet been publicly released.

Critics contend that ESG scores routinely are being used by investment and accounting firms, banks and credit rating agencies to grade companies on how well they have adopted certain liberal policies or values, such as reducing the effects of climate change, increasing diversity on their governing boards, and supporting social justice causes. There is no single accepted national standard for determining ESG scores.

Regarding public pension plans, ESG critics say investment management companies could substitute ESG factors for traditional financial considerations, resulting in investments having lower rates of return and plans being underfunded.

There were 173,786 retirees and beneficiaries in South Carolina’s five retirement systems, according to the state Public Employee Benefit Authority’s annual report for the 2022 fiscal year.

“If we don’t feel like they’re (state investment managers) looking out for our best interests, and if we’re investing to make money, they may make some money, but if their practices are not in our best interests … to make our (state) pension grow, that’s where we can step in, and that’s what we’re trying to do,” said Rep. Doug Gilliam, R-Union, when contacted this week by The Nerve.

Gilliam prefiled a bill last month which, among other things, requires that state investment managers “take into account only financial factors when discharging its duties with respect to a plan and may not consider environmental, social, and governance (ESG) standards.”

The bill specifies that investment managers can’t take actions to “further social, political, or ideological interests” beyond what “controlling federal or state law requires,” including:

  • Eliminating, reducing, offsetting or disclosing greenhouse gas emissions;
  • Divesting from or limiting investments in any company for “failing, or not committing, to meet environmental standards or disclosures,” or “supporting the manufacture, distribution, sale, or use of firearms”; or
  • Access to abortion, sex or gender change, or transgender surgery.

“We want our (state) pension to grow, and we want it to grow as fair as we can get it,” Gilliam told The Nerve.

Gilliam designated his bill for referral to the budget-writing House Ways and Means Committee. The full Legislature reconvenes on Tuesday.

Michael Hitchcock, CEO of the S.C. Retirement System Investment Commission (RSIC), told The Nerve last year that neither the BlackRock nor State Street investment firms makes “any investment decisions for us whatsoever.” He said then that the pension’s plan 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.

BlackRock – the world’s largest asset manager – and State Street as of June 30, 2021, were managing publicly traded stocks totaling about $13.6 billion and $4.9 billion in market value, respectively, according to the most recently available RSIC annual investment report. The companies were the only investment management firms involved with the public equity portfolio of the state pension plan for fiscal 2020-21.

Republican State Treasurer Curtis Loftis, who by law appoints one member to the RSIC’s seven-member governing board, made national news in October when he announced he would divest the final $200 million of BlackRock holdings from a $5 billion portfolio managed by his office. Loftis in an April Nerve story shared his general concerns about the ESG movement.

Following Loftis’ October announcement, Dallas Woodhouse, executive director of the South Carolina Policy Council – The Nerve’s parent organization – publicly called on state lawmakers to take further steps to protect state taxpayers.

Asked about Gilliam’s bill, Hitchcock in a written response Wednesday to The Nerve said the RSIC is “guided by the standard found in our existing governing statutes that requires us to always act in the sole interest of our plan participants and for the exclusive purpose of providing benefits.”

Hitchcock continued: “As a result, we make investments that we believe will provide us with the best risk adjusted return and do not consider or promote non-pecuniary goals, objectives, or outcomes, including but not limited to what is commonly referred to as ESG. However, if the General Assembly will gain comfort by providing us with additional guidance in this area, then we look forward to working with them to achieve this goal.”

Gilliam’s bill isn’t the only prefiled legislation aimed at banning liberal policies in public-finance decision making. A bill co-sponsored by Reps. Melissa Oremus, R-Aiken, and Mike Burns, R-Greenville would, among things, generally prohibit government entities from entering into contracts of $100,000 or more with businesses having at least 10 full-time employees that boycott another company engaging in the “exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel based energy, and does not commit or pledge to meet environmental standards beyond applicable federal and state law.”

“It’s just saying that if you’re going to do business in South Carolina, it’s a free market here, and we’re not going to put all these regulations on you,” Oremus told The Nerve when contacted this week.

The bill was designated for referral to the House Labor, Commerce and Industry Committee.

Brundrett is the news editor of The Nerve (www.thenerve.org). Contact him at 803-394-8273 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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