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A controversial proposal cracking down on alleged ESG investing in public pensions—while supporting “discriminated” businesses in contentious industries—passed the House mostly along party lines Monday.
Forbes defines ESG strategy as investing in companies that score highly on environmental and societal responsibility scales as determined by third-party independent companies and research groups. Advocates for ESG investing argue that they should use their investment funds in a way that reflects their values. Opponents say that results, not dogma, should drive investment strategies.
“House Bill 1008 is about freedom and fairness in financial markets,” bill author Rep. Ethan Manning, R-Logansport, said on the floor.
“ESG, or so-called environmental, social and governance policies, are highly subjective measures that have real-world impacts,” Manning added. “We need to focus our pension investments, the roughly $45 billion in assets we control, on financial factors, and leave politics and social and ideological considerations out of it.”
Democrats, meanwhile, argue the bill will harm—not help—pensions.
The House passed the bill 66-30, with all Democrats voting in opposition. Rep. Ed Clere, R-New Albany, also voted against the measure.
After its passage, a barrage of GOP representatives—nearly four dozen—signed on as co-authors. The bill now heads to the Senate for consideration. The Senate already passed a more streamlined version.
What’s the bill do?
Manning’s bill defines what actions would count as ESG investing—like investor leeriness of specific protected industries: firearms, fossil fuels and more. And it would require the Indiana Public Retirement System and the Indiana State Police Pension Trust to divest from offending funds or cut ties with erring financial managers.
The bill bestows the power of enforcement upon Republican State Treasurer Daniel Elliott, who has professed his support for it. If Elliott thinks a fund or manager is violating the bill, he’d be able to investigate them—with the Office of the Attorney General’s help.
If Elliott decides they’re in violation, the pensions entities would have 180 days to start divesting—unless the INPRS or ISP boards decide that would actually hurt finances. Then, a board would have to make its rationale public.
The bill originally held external financial managers to the same standards as INPRS, applying in all activities—even to business dealings unrelated to Indiana’s pensions. A substantial amendment last week exempted private equity managers from key provisions, and specified that the bill applies only to what managers do “on behalf of assets managed for the public pension system.”
The bill also includes limits on proxy votes, which are opportunities for shareholders to influence an entity’s management.
Last week’s changes eased INPRS’ fears and brought the bill’s price tag down, but that hasn’t satisfied Democrats, who continued to grill Manning on his intent and specific provisions.
Pension worries linger
A revised fiscal analysis says divestment could still cost INPRS a pretty penny.
“Potentially, the funds may earn a lower rate of return as a result of divestment, or if enforcement of the bill limits the pool of investment managers as a result of the requirements of the bill,” the analysis notes. And it says that if the funds don’t earn the expected 6.25% return on investment, Indiana and local government employers would have to pay up.
Democrats seized on that last week, when they lobbed 10 proposed changes at the bill, mostly seeking to exempt specific funds. All of the amendments failed in party-line roll calls or were ruled out of order.
On Monday, they criticized Manning for preserving the list of industries he said were “unfairly boycotted under ESG policies” and potentially impacting corporate diversity goals.
A string of firearms manufacturers and fossil fuel companies said in committee this month that financing, insurance and shipping servicers had gradually been declining to serve them because of their industries.
“The ‘fairness’ that you concern yourself with is fairness with industries that you like, [and] that you think other people disfavor,” Rep. Ed DeLaney, D-Indianapolis, told Manning on the floor. “That’s your fairness.”
Manning said it didn’t matter if he liked the industries, adding, “I just know some of these industries are performing very well, and we want them to be available for investment—not arbitrarily limited by the asset manager.”
Rep. Matt Pierce, D-Bloomington, also criticized the inclusion of Indiana’s civil rights code on a list of ESG criteria that would run counter to the bill.
“By voting for this bill, you’re going to say it’s the policy of this state to protect firearm manufacturers and fossil fuel companies,” Pierce said, “while prohibiting anything that would prevent, in the corporate setting, discrimination against all the people that have suffered discrimination in the past. … What century are we in?”
Manning pushed back.
“This doesn’t change our civil rights statutes. You cannot discriminate based on the protected classes that we’ve lay out,” he said. What we’re saying is you can’t institute these quotas and things on corporate boards without having a financial reason for doing so.”
The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.
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Lawmakers REALLY HATE when people put their money when their mouth is, and hate it even more when their own misconduct is being investigated.
ESG is one of the worst Democrat inventions since slavery. Why is it that Democrats are always trying to find ways to enslave the common man to enrich themselves?
Why are Republicans so hating of the free market all the sudden?
“Manning said large financial management firms were “using their market power” to “push these policies on the private sector,” characterizing it as a “subversion of democracy.” He spoke before the House Ways and Means Committee, which must approve every bill with a financial impact.
“We have to push back against those ideas, and the available funds that we have to do that are large amounts of pension funds. INPRS has about $45 billion,” Manning added.”
So let’s take someone else’s money – the pension funds of police and teachers and firefighters – and jeopardize that for political reasons.
Little wonder Republicans declined to use their own pensions as a pilot … or to reimburse any losses from the General Fund.
https://www.ibj.com/articles/anti-esg-bill-clears-financial-panel-with-new-5-5m-price-tag
Lol this is a market creation, literally an outcome of capitalism.
Oh, geeze – invest in the companies that give the best return. It’s not complicated. Another solution in search of a problem.
+1
And this, in the short run, will probably have an impact on low returns, on top of already low growth and return. Looks like its time to pull my funds out of INPRS and invest with other Financial Managers that don’t play politics with my funds for retirement.
This is a bill by the Righteous Right that is just as bad the the Socialist Left. Long ago the Courts developed the Prudent Man rule for Trust Investing (Pensions are a Trust). When the Legislature approves or directs either, it creates compliance costs at best, and can re-direct funds outside the lowest risk yet highest and best return aspects of the Prudent Man rule, limiting investment growth. INPRS has and still follows that rule now, quite successfully, especially compared to our western neighbor. Better not to tinker in either direction, and limit the best investment decision at the time in favor of some current social policy, whether in favor or against.
Fred S, You’ve got it backwards. It’s the ESG funds that are restrictive, in terms of investment choices. ESG funds are designed specifically for investors who have consented to give up return, or take more risk, to contribute to some ESG objective. And an ESG fund manager is by definition selecting investments from a subset of the universe of investment opportunities a manager who doesn’t consider ESG can choose from. So there is no way one can expect ESG funds to outperform funds in general, in the future, since there’s nothing to prevent a general fund manager from selecting the best investments based on financial considerations. The pensioners in INPRS have not consented to giving up return, or taking more risk, to achieve ESG objectives; thus, investing INPRS capital in ESG funds is in violation of their fiduciary duty to select investments based on financial considerations only (i.e., risk and return). And if INPRS believes some ESG fund is the best investment based only on financial considerations, the bill allows INPRS to invest in it.
Steven, I’m not sure you made your point.
INPRS has never used ESG considerations. They’ve solely been using returns. If that’s in a pro-ESG fund, they use it. If it’s in an anti-ESG fund, they use it. They testified to this in hearings for the bill.
The original House bill introduced told INPRS that they must prioritize anti-ESG considerations ahead of the returns given – as explained by Manning himself quite proudly. Meaning, INPRS must pass up the funds with the best returns if they’re “pro-ESG” as defined by the bill. Hence the $6 billion dollar cost tag.
The modifications that gut the bill still introduce unneeded overhead. Manning should just withdraw his bill and his caucus should just pass the Senate variant, which codifies the existing INPRS policy. But, he’s got to do something to justify his government salary, so nevertheless he persisted.
Joe B, My understanding is that the original $6.7B price tag was based on the INPRS’s interpretation of wording in Manning’s original bill that suggested that INPRS could not do business with a fund provider who ran ESG funds, regardless of whether INPRS invested in those funds. I see no way they could have gotten to the $6.7B based simply on simply excluding ESG funds from the INPRS’s consideration. That would imply they’ve estimated huge premiums to future ESG fund returns, and that makes no sense for the reasons I explained in my prior post. The Senate version, as I understand it, would allow INPRS to invest in ESG funds for purely financial reasons (of risk and return). But this is a problem, again for the reasons explained in my prior post, because there’s no logical reason to expect an ESG fund to outperform a general unrestricted fund. But who do most pension fund managers rely on to form expectations about future fund returns? The sales personnel of fund families pushing ESG funds because it’s there new high margin product. The bottom line is, INPRS managers can fulfill their fiduciary obligations to pensioners without using ESG funds, whereas investing in ESG funds will most likely harm their financial results. That said, I tend to agree that creating a bureaucracy to record all the proxy votes seems like overkill.