Two Appalachian states — West Virginia and Kentucky — are making sure their pension systems are protected from retirement fund managers who would prioritize environmental, and social, and governance (ESG) factors in retirement decisions.
Since Biden’s veto of the congressional push to ban the practice, the onus has moved to the states. Earlier this month, 16 Republican governors pledged to use their collective financial heft to fight the administration. And now, measures are being enacted that would see the practice restricted with regard to state pension funds. National Review spoke to two treasurers leading the charge: Kentucky’s Allison Ball and West Virginia’s Riley Moore.
In Kentucky, Governor Andy Beshear signed legislation last Friday that puts a fiduciary’s responsibility solely on maximizing returns and establishes a proxy voting transparency system. West Virginia governor Jim Justice is expected to sign similar legislation this week. The bill would require the state’s investment boards – which manage more than $34 billion in public pension and state investment funds – to cast proxy votes solely based on the financial interests of pensioners and taxpayers, not ESG factors.
For both Ball and Moore, the legislation is personal. West Virginia and Kentucky are two of the country’s largest energy producers, boasting sizable coal and gas industries. They also have populations whose social views aren’t preferred by those who would prioritize ESG.
“We’re the 5th largest energy producer in the country. Obviously this ESG movement is directly aimed at our livelihood and our economy and our jobs and it’s not just that. It’s also the social issues that they’re pushing which are also diametrically opposed to our way of life here in West Virginia,” explained Moore. “We may not be the richest state but I’d say in terms of culture, in terms of family, in terms of our civic ties…we are one of the richest, but they want to destroy that too.”
To Ball, “ESG is not an easy thing to tackle and take on for a small state and there’s big pressures and agendas and companies that are involved with this.” However, she explained, “we have a lot of lawmakers who are from regions where the fossil fuel industry is still present and part of the employment structure.”
Both expressed disappointment with Biden’s decision to veto the federal measure against ESG and cited it as impetus for their states’s efforts. Ball even visited D.C. when the congressional anti-ESG legislation was passed.
“I think it’s really unfortunate that the first thing he does threatens and jeopardizes and weakens people’s retirement pensions at a time when there’s inflation and insecurity economically. This is when you should be supporting people’s pension systems, not putting them at risk,” explained Ball.
The anti-ESG measures have been paved by previous efforts in both states to divest from companies who boycott fossil fuels. Ensuring that state pension funds are free from political decision-making contrary to the values of residents was a natural next step.
Moore was the first treasurer in the country to divest from the asset management company Blackrock and his office drafted House Bill 2862. He explained to National Review the reason the legislation focuses on the proxy voting system in the state pension fund.
State pension funds have thousands of votes that need to be cast in a given year, Moore said. The state pension boards often delegate to asset managers like Blackrock, who in turn delegate the proxy to advisory services like ISS and Glass Lewis. These advisory services will come up with recommendations of how those shares should be voted.
“ISS and Glass Lewis have stated very clearly…their mantra is they’re going to recommend those votes be cast in an ESG framework,” explained Moore. The asset managers vote most of the time, with Moore explaining Blackrock does so 80 percent of the time, on the recommendation of these advisory services.
“If you take away their ability to leverage proxy votes on boards…you are taking away their power,” said Moore. “I happen to think [the recommendations are] completely converse to the maximization of benefits for pension beneficiaries which is the whole reason we have a pension plan to begin with. It is to make money.”
The legislation, which will mandate votes are cast in the best financial interest of retirees, was able to be pushed through despite some amendments from fellow Republicans which attempted to gut the bill, Moore explained.
In Kentucky, the legislation also establishes transparency with regards to the proxy voting system and it puts a fiduciary’s responsibility solely on maximizing returns.
Ball explained that after consulting with the Kentucky attorney general, she realized Kentucky law was clear that ESG is not permitted.
However, “we were beginning to get pushback from some of the pension systems saying they didn’t agree with that interpretation of the law,” explained Ball.
“We felt it was necessary to put this in statute definitively. This is what the law is and it is the most clear and strongest fiduciary obligation in the country I think when it comes to fiduciaries only investing for pecuniary reasons, only investing for returns. It actually expands the fiduciary obligations, so it’s not just people who sit on boards, those are your traditional fiduciaries, but it expands it out so asset managers, investment managers, they’re also now under an investment obligation,” she said.
Ball and others Kentucky lawmakers have felt it necessary to prioritize an ESG bill because Kentucky has the largest unfunded pension system in the country, meaning assets are less than the accrued liabilities.
“One of the best ways to make sure it stays on a good path is to make sure it gets good returns,” Ball said.
The Kentucky treasurer explained that the law even gained Democratic support in the legislature on account of the fact the state has this unfunded pension system. Ball also explained Governor Beshear signed the law because he knew there would be enough numbers in the legislature to overturn any veto.
“It’s an election year for him. That may have influenced his decision to go ahead and sign this and not have a big battle,” explained Ball.
The treasurer welcomed other states to follow Kentucky’s example.
Moore, who is running for Congress, explained that he has plans to continue his anti-ESG work at the federal level. One issue he is concerned about is ratings agencies like S&P Global, which are now handing ESG scores to states and municipalities.
“West Virginia is potentially going to get downgraded not because of our finances. They’ve never been better…No, it’s over our industries, which at the end of the day is economic extortion,” said Moore.
“If we don’t comply with these ESG standards and we are downgraded in our bond rating it will now cost us more money to build schools, hospital, roads,” he concluded.