States Shouldn’t Play Politics with Their Investments—Regardless of the Direction
The prevalence of state treasurers in the more liberal areas of the country investing their state’s pension money in funds that prioritize environmental, social, and governance (ESG) issues makes for bad policy. Such investment priorities are unwise, I’ve argued, because they effectively prioritize social policy over the best interests of the people whose pensions depend on those returns. Many of the states that have been most aggressive in embracing ESG funds for their state’s investments also have sizable pension fund shortfalls, which the politicization of pension investments especially circumspect.
Recently, some states where the oil and gas industry have a large presence prohibited their state’s investments from using ESG criteria for investing. Such actions are intuitively seen as direct reactions to steps taken by other states that mandate ESG investment, which some states see as harming fossil fuel companies within their state. For instance, Texas prohibits its insurance companies from using ESG criteria in its investment decisions, and Florida passed a law earlier this year prohibiting the use of ESG factors in state and local government investment decisions and the government contracting processes.
However, the Oklahoma Government has taken its opposition to ESG investing one step further—and in doing so is harming its own pensions’ finances in the very same way that liberal states do with their restrictions.
Oklahoma State Treasurer Todd Russ recently put forth a list of financial service companies that “boycott the oil and gas industry” by which—consequently—the state will no longer do business with. The list includes several large banks and asset managers that have invested tens of billions of dollars in Oklahoma oil and gas companies and helped hundreds of thousands of pensioners grow their retirement savings.
Both restricting investments to funds that have ESG criteria and prohibiting state pension plans from putting their money with investment companies that also manage ESG funds are not in the best interest of the state’s residents.
Just like restricting investment to ESG funds, restricting investment from funds with ESG offerings will also reduce investment returns and cost retirees money. In the case of Oklahoma, Russ acknowledged that taking Oklahoma investment money out of BlackRock and State Street, the two largest investment managers on the list, would cost the state’s pension at least $10 million due to lower returns. The size of BlackRock and State Street allows them to offer index and other minimally-managed funds at a management fee lower than most of their competitors.
It’s also worth noting that the list does not seem to be inclusive: For instance, the Oklahoma list omits several firms that have voted for more climate-related shareholder proposals or that hold similar memberships in sustainability organizations as the firms Russ included in his boycott list. The lack of clear guidelines or criteria led some companies to suggest that Russ’ true intentions may be, in fact, to use the boycott list to score political points at the expense of pensioners.
For example, Northern Trust—which is not on the list—voted for more than 80% of climate-related shareholder proposals in 2022 and ranked in the top 15 of Ceres’ asset managers list – higher than both BlackRock and State Street which are in the bottom 10. Northern Trust also happens to be a member of Climate Action 100+ and the Net Zero Asset Managers Initiative.
I do not mean to insinuate that Northern Trust should be placed on the prohibited list—because there clearly should not be such a list—but the fact that it has been relatively active on the ESG front but is excluded indicates that the list itself is somewhat subjective.
The politicization of banks and asset managers has already impacted Oklahoma communities. For instance, officials in Stillwater were recently forced to freeze a series of infrastructure projects after discovering that their inability to finance those projects via the Bank of America meant that they would be forced to pay higher bank fees, adding $1.2 million in additional costs.
The Oklahoma Public Employees Retirement System (OPERS) noted the harms of these divestments and voted to exercise its fiduciary exemption, as permitted under the law. Joseph Fox, executive director of OPERS, stated that “compliance with the divestment and contractual prohibitions of the Oklahoma Energy Discrimination Elimination Act would be inconsistent with its fiduciary responsibility.”
Ginger Sigler, the executive director of the Oklahoma Police Pension and Retirement System, has also voiced her opposition to the creation of a list of prohibited financial advisers, noting that the underlying basis for placement on the list hasn’t been disclosed.
Constraining the choices of investment managers by state pension administrators, regardless of the reason, will be costly to their beneficiaries. Research conducted by economists at the Wharton School of Business and the Federal Reserve Bank of Chicago estimated that Texas’ anti-ESG laws will cost issuers between $300 and $500 million in additional interest on money borrowed within just the first year of the legislation taking effect.
Similarly, the Sunrise Project found that if states were to enact anti-ESG banking restrictions similar to what Texas passed in 2021, issuers in Kentucky, Louisiana, Oklahoma, West Virginia, and Missouri could collectively be on the hook for hundreds of millions of dollars more in lost interest through municipal bonds.
Oklahoma’s desire to teach investment managers a lesson amounts to putting politics over pensions, and if unchecked would set a precedent for other conservative states to emulate—to the detriment of their government’s retirees.
Limiting competition for government services—in this case the privilege of managing a portion of a state’s pension portfolio—effectively increases what states have to pay for this service, which pushes costs onto the state’s retirees and taxpayers—albeit in a way that may not be obvious to the typical voter.
State pension administrators should select investment advisors who can achieve the highest return for the least risk, regardless of any political calculus on either the left or the right. Oklahoma—and other states—are hurting their taxpayers and retirees solely to make a political statement.
