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A new evaluation system is underway that will change how the state of Indiana invests the pension money of Hoosier government workers.
State officials are actively vetting the Indiana Public Retirement System’s portfolio of asset managers to weed out those practicing ESG investing, a type of investment strategy that considers the costs and risks associated with environmental, social or governance concerns.
Indiana State Treasurer Daniel Elliott announced June 21 that officials had flagged the first company based on the review: New York City-based BlackRock, the world’s largest asset manager. The Treasurer’s Office placed Black Rock on a watch list, but the retirement system’s board could take further action, including removing the firm from the state’s retirement investment portfolio.
The Treasurer’s office is currently evaluating about 10 to 15 other asset investment managers and service providers, spokesperson Abhilash Reddy told IBJ.
The new system implements House Enrolled Act 1008, which passed last year and bars the influencing of “any social or environmental policy or attempting to influence the governance of any corporation for nonfinancial purposes” in the investment system’s $45 billion in assets.
The law defines an ESG commitment as a company deciding to make asset choices that take into account nonfinancial factors “to further social, political, or ideological interests based on evidence indicating the purpose.” Private equity funds, which make up about 15% of the state’s total pension investments, are excluded.
It further explains that an asset manager would fall into that definition if it divests from companies that deal in firearms or fossil fuels, contracts with U.S. Immigration and Customs Enforcement or refuses to have environmental standards.
Indiana joined a host of other Republican-led states passing anti-ESG laws in an attempt to dissuade large banks, investment firms and asset managers from public stances and investments hinging on climate change, gun control and other social issues.
Indiana’s anti-ESG investment law is more moderate than some other states, including Texas and Florida, which have expansive ESG definitions, a larger account scope and strict guidelines. Indiana’s bill was reeled back after fiscal analysts concluded an initial proposal would have resulted in a $6.7 billion loss for retired public employees over the next decade.
When it came to creating the vetting process, Reddy said, the Treasurer’s Office studied other laws and worked with other states for advice on the Indiana law’s implementation.
“We took best practices from other treasures and other states and experts,” he said. “The treasurer was able to implement best practices and try to put together a law that works for Hoosiers.”
How ESG commitments are reviewed
Elliott and his office kicked off the vetting process by collecting data about a company’s ESG presence. The treasurer also must attempt to ask each company for information.
Evidence constituting an ESG commitment can include advertising, statements, explanations, reports, letters to clients, communications with portfolio companies, statements of principles and participation in coalitions, initiatives and agreements. The office does not include any materials outside what’s listed in legislation, Reddy said.
The office leans on documents such as SEC filings, he said, since those documents are written by the companies themselves. Alliance memberships, like BlackRock’s participation in a net-zero emissions consortium, are also helpful, he said.
There is not an average timeline yet for how long these investigations take, Reddy said, but the recent BlackRock decision took a few months.
If the treasurer finds reasonable cause of an ESG commitment, he will compile a report with evidence and add a company to a watchlist.
From there, the process is handed off to the INPRS board, which has 180 days to make a decision on divestiture and replacement, if necessary.
The law states the board cannot enter into or continue in a contract with a provider that is found to make an ESG commitment.
However, the board must replace that company with a comparable alternative within those 180 days. If the board finds a replacement does not exist, it can continue with a provider and must give an explanation with evidence in its meeting minutes.
In a statement to IBJ, INPRS spokesperson Dimitri Kyser said the office will follow its “ESG Commitment Policy & Procedure” presented at its October 2023 meeting. The Treasurer’s Office will be involved as a partner to help where it can, Reddy said, but the authority lies with the INPRS board. Elliott is a member of the nine-person board.
The board has until mid-December to make a decision on BlackRock’s future.
After each company is reviewed, Reddy said, the Treasurer’s Office will continue to monitor its potential ESG commitments.
“The treasurer intends to be pretty vigilant about this,” he said.
The “safeguard” clause
The law’s clause requiring a comparable alternative asset manager is a safeguard for the state’s investments, Reddy said.
“Undergirding all of this is making sure that we get the best investment returns for all Indiana pensioners,” he said. “Ultimately, the law requires that it’s all about the numbers. It’s all about the best returns.”
The INPRS board must replace a company found to have an ESG commitment with a comparable provider so as to not violate its fiduciary duty to its constituents.
“The whole purpose of this law …it’s all about the best financial outcome above all else,” Reddy said. “What we’re saying is, if this is the best we can do then this is the best we can do.”
IBJ found that of the 14 states with anti-ESG laws similar to Indiana, at least six have exceptions that allow the state to remain invested in a company if a financial alternative is not available.
The state with the most comparable clause to Indiana is North Dakota, which says a company must be divested unless “a social investment would provide an equivalent or superior rate of return compared to a similar investment that is not a social investment.”
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“Undergirding all of this is making sure that we get the best investment returns for all Indiana pensioners. Ultimately, the law requires that it’s all about the numbers. It’s all about the best returns. The whole purpose of this law …it’s all about the best financial outcome above all else. What we’re saying is, if this is the best we can do then this is the best we can do.”
Putting all those quotes together just underlines how pointless this law was. If a company made ESG investments that hurt their returns, Indiana was going to drop them anyway. And if all the best companies produce the best returns without guns or oil? Indiana is going back down.