Anti-ESG measures are everywhere, but some are floundering in GOP states

Fiduciaries are citing the high costs of legislation restricting the use of ESG, and some state leaders are listening.

A bill passed in the Kansas legislature Thursday would restrict the use of ESG in investing state money, but not as much as the authors had initially set out to.

The substantially amended bill, which would require Democratic Gov. Laura Kelly’s signature, is the latest instance of the anti-ESG push by Republicans in numerous states. But it’s also the latest of such efforts to be pared back amid revelations by the people who actually manage state assets that restricting investment options would likely cost billions of dollars.

In Kansas’ case, the original version of the bill would have cost the pension system at least $3.6 billion over 10 years, according to figures from the Kansas Public Employees Retirement System. That was in part because the restrictions would have caused public pensions to fire any asset managers that separately provide ESG-themed investment options, even if those options were not the ones used in the pension.

“The initial divestment in private markets is estimated to cost KPERS approximately $1.14 billion from early divestment and could lower the system’s funded ratio by 4%,” the retirement system said in correspondence to the legislature in March. “In addition, a theoretical restructured investment portfolio of 60% equities and 40% bonds would lower expected investment returns by 0.85%. This lowered investment return would increase the liabilities of the system, which would increase the unfunded actuarial liability and require increased employer contribution rates.”

Although the current version of the bill would require the pension system to make decisions “solely in the financial interest of the participants and beneficiaries,” that is already a directive for it and other fiduciaries everywhere.

Early evidence of financial consequences of anti-ESG measures surfaced last year in Texas, where research from the Wharton School found that a new law restricting business with certain banks will cost the state’s issuers an extra $300 million to $500 million in interest on $31.8 billion borrowed in the first eight months of the law going into effect, as a result of a lack of competition in the market.

“So much of what’s being branded ‘ESG’ funds or ‘ESG’ managers in this debate, these are not impact funds — they’re mainstream funds. When you take away access to larger institutional asset managers … you start losing economies of scale,” said Josh Lichtenstein, partner at Ropes & Gray. “You also start losing access to certain types of strategies that may not be available at smaller managers.”

One of the strongest examples of pushback against anti-ESG measures comes from Kentucky, Lichtenstein noted. There, the County Employees Retirement System wrote to the state treasurer that avoiding asset managers placed on a blacklist due to allegedly boycotting the fossil fuels industry would be “inconsistent with its fiduciary responsibilities with respect to the investment of CERS assets or other duties imposed by law relating to the investment of CERS assets, thus, per the law, it is not subject to the notification and other requirements,” according to a copy of the letter published by Chief Investment Officer.

Resistance to anti-ESG measures has also popped up in other Republican-leaning states, including Indiana, North Dakota and Wyoming, where legislation has either been dropped or watered down amid cost concerns raised by state fiduciaries, according to reporting by Bloomberg.

In Indiana’s case, language in the bill was pulled back after a projection showed $7 billion in costs associated with the anti-ESG measures.

Additionally, that report found, nearly all county treasurers in Arizona opposed anti-ESG bills in the state legislature for similar reasons, and a handful of bills in Mississippi failed to advance.

At a time when ESG has become heavily politicized — in no small part due to efforts against it in Florida and Texas — every U.S. state has now at least considered measures for it or against it.

Among those taking actions to promote ESG integration in state assets have been Oregon, Washington, New Mexico, Minnesota, Wisconsin, Illinois, Maryland and Delaware, according to an ongoing report by Ropes & Gray. Some states are going further by adopting initiatives to divest from certain industries, such as fossil fuels. Those efforts have been seen in California, Nevada, New Jersey, New York, Connecticut, Massachusetts, Rhode Island, Vermont and Maine.

This year, such a measure in Oregon, House Bill 2601, would have required the state’s pension system to divest from fossil fuel holdings. That bill, which the state treasurer, Tobias Read, did not endorse, failed to advance.

Although the state has a commitment to reach net-zero emissions in its Public Employee Pension Fund by 2050, “I don’t think it’s appropriate to have investment policy in statute,” Read said.

That state faces more pressure to fully divest from carbon-intensive industries than to scrap ESG from its considerations, he noted. However, that could be at odds with the $100 billion system’s top priorities of maximizing returns and reducing risk — it has to seek long-term returns as well generate more than $430 million a month in cash to send to current retirees, he said.

“If it were up to me, we would drop the ‘ESG’ label entirely,” Read said. “Let’s just make it really clear for people: You are going to do more poorly as an investor if you not thinking about the manufacturing company you are investing in having its supply chain exposed to rising sea levels and wildfire risk … It’s irresponsible to willfully deny information that can help you make better decisions.”

Even so, projections showing negative financial consequences may not convince everyone to walk back anti-ESG measures.

“There are diehards who are [connected] to certain narratives, and I’m not sure that the data is going to affect them much,” Lichtenstein said.

But, he said, “my gut is that we’ll continue to see a meaningful impact from the push back.

“A lot of [Republican] state legislators come from a more traditional Republican background, being wary of creating more business regulations and putting a hand on the scale of the market,” Lichtenstein said.

It’s also notable that efforts in Democratic-majority states have largely favored ESG considerations for public assets but have not focused on restricting data that can be used for informing investment decisions, he said. Because of that, “there may be room for common ground there with many of the red states.”