State pension fund managers give assurances that ESG factors aren’t considered in investment strategy

by | Jan 25, 2023

  • State pension fund managers assured lawmakers that investments were being made solely on financial returns and not on controversial environmental, social or governance (ESG) standards
  • While some leading investment fund managers insist that ESG standards correlate directly with higher profits, those factors cannot be used to direct investments under new state rules
  • Testimony today before House leaders centered around investment criteria used to manage billions in state pension dollars

TALLAHASSEE — As Gov. Ron DeSantis and other Florida Republican leaders regularly criticize “environmental, social and governance” investing, state pension-fund managers maintain some investments in firms that could draw fire for being overly progressive.

Lamar Taylor, interim executive director of the State Board of Administration, told members of the House Constitutional Rights, Rule of Law & Government Operations Subcommittee this week that managers are expected to determine the best returns on investments.

“Our expectation is when they make those decisions, they’re making them for the best economic interest of our beneficiaries,” said Taylor, whose agency oversees investments for the Florida Retirement System and other state programs.

DeSantis and the Cabinet last week made changes that directed investment decisions to be based only on “pecuniary factors.”

Under the directive, pecuniary factors can’t include “social, political, or ideological interests.” Republican leaders in Florida and other states have targeted companies that include in investment strategies environmental, social, and governance standards known as ESG. Such strategies, for example, can take into account climate change, racial inequality and supply-chain labor standards.

But the directive also required state investment managers to make “a prudent assessment of its impact on risk and returns.” DeSantis and the Cabinet serve as trustees of the State Board of Administration.

“The only thing we’re going to consider are the economic risk and return factors with respect to the investment,” Taylor told the House panel Tuesday. “If there is anything else, it’s gravy. The question is, what is going to generate the best economic risk and return for the beneficiaries.”

Rep. Dotie Joseph, a North Miami Democrat who serves on the House panel, said she wanted assurances that participants in programs such as the retirement system aren’t harmed fiscally.

“A lot of these companies do, unlike the free state of Florida, care about this kind of stuff, and it does make a difference on the bottom line,” Joseph said after the meeting. “Short-term studies have shown those companies do tend to perform better than those that don’t.”

Taylor’s comments came a day after state Chief Financial Officer Jimmy Patronis announced he was barring state asset managers from using any of the $5.1 billion in the Florida deferred compensation program, a supplemental pension coverage offered to more than 93,000 state employees, from making investments associated with environmental, social and governance strategies.

“As ESG has gone unchecked throughout the financial services sector for too many years, fiduciaries who believe ESG is bad for returns need to take steps in redirecting dollars away from these funds, and into ones that are more focused on the bottom line,” Patronis said in a prepared statement.

Patronis called ESG “undemocratic” and said it “constrains companies’ ability to pursue the best returns possible.”

House Speaker Paul Renner, R-Palm Coast, has called for the Legislature to make changes to move away from Wall Street companies that have adopted “radical environmental and diversity goals.”

Sen. Ed Hooper, R-Clearwater, has filed legislation (SB 110) that would put into law a requirement for State Board of Administration evaluations to be based solely on “pecuniary factors.”

On Monday, Patronis said the Department of Financial Services is working with asset managers to remove three investment funds from the deferred compensation program because of ESG issues. Patronis identified them as Neuberger Berman Sustainable Equity Fund (Nationwide), the VALIC Company I Socially Responsible Fund (Corebridge) and the Vanguard FTSE Social Index (Voya) Fund. Combined, the three account for less than 1 percent of the deferred-compensation program.

Last year, Patronis put an immediate freeze on about $1.43 billion in long-term securities and about $600 million in short-term overnight investments managed by BlackRock — the largest asset-management firm in the world — because of the firm’s use of ESG standards.

While Patronis and other Republican leaders have touted their efforts, firms have defended using ESG.

BlackRock CEO Larry Fink, a leading proponent of ESG metrics, in a letter last year to corporate executives, said companies using the standards are “performing better than their peers.”

A Dec. 8 report from Infosys Research, an information-technology company, concluded that “increased ESG investment correlates with higher profits.”

“Many companies focus ESG efforts on the environmental segment with commitments to carbon neutrality, net zero, and reducing greenhouse gas emissions,” Infosys reported. “However, there are also opportunities to improve financial results through social and governance initiatives. Research data shows social initiatives like board diversity correlate to improved profitability.”

Still, “the report acknowledges that despite ESG’s clear link to profit growth, budgets are likely to be an obstacle in the current economy,” a news release with the Infosys report said. “This is worrisome, as companies need more financial resources and operating model changes to achieve ESG goals and sustain profit growth.”

1 Comment

  1. Deborah Coffey

    This is sick. But, invest in Russia? And lose $300,000,000 of our pension fund!

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