Powerful conservative outfit targets pension funds in behind-the-scenes effort to protect the fossil fuel industry
Worker in front of an oil rig. (Shutterstock)

Group Behind Restrictive State Laws Wants to Stop Investments in Companies with Pro-Environmental and Social Policies

The right wing’s legislative hit squad is targeting a wide variety of corporations that focus on environmental, social and governance issues as well as profits.

The conservative back scene influencer group American Legislative Exchange Council (ALEC) is known for successfully pushing model state legislation written by its corporate and political sponsors, many of which are in the fossil fuel energy business.

ALEC has long provided Republican-dominated legislatures with so-called model bills that address a broad range of right-wing issues, such as reducing regulation and individual and corporate taxation, combating immigration, loosening environmental regulations, tightening voter identification rules, weakening labor unions and opposing gun control. States have adopted thousands of ALEC-written or -inspired laws since the group’s inception in the 1970s.

Its latest attempt has donned the guise of “protecting” public pension funds from “liberal” social activists. But in reality, the move is an attempt to protect large oil and gas interests while trying to undercut attempts to address types of social inequity through investors exercising the power of the purse.

The move is an attempt to protect large oil and gas interests while trying to undercut attempts to address types of social inequity through investors exercising the power of the purse.

The target of ALEC is a term called ESG, an acronym that stands for environmental, social, and governance. The concept is broadly employed in business because there are aspects of what companies do beyond money that have an impact on communities, employees, business partners, and investors.

One example of ESG in action could be a company reducing its carbon footprint to help address climate change, under the capitalistic recognition that massive disruptions to climate could affect a company’s operations and ability to reach customers and sell. Another, speaking out about anti-gay legislation in a state as a company might see all people, whatever the gender identity, as part of their market. Governance is typically about how a company is run and whether it protects the interests of its shareholders.

'Money-Making Opportunity'

Interest in ESG among investors has been increasing over the years because, as a paper out of the Center for Sustainable Business at New York University’s Stern School of Business shows, there are “positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital.” A 2020 Bloomberg analysis noted that “sustainable investing isn’t just for do-gooders” and that it is “a money-making opportunity that’s gaining popularity.”

According to a major European bank, BNP Paribas, “ESG principles have become an increasingly important part of the investment universe for all types of managers, including both hedge fund and traditional asset managers.” They see big hedge funds incorporate ESG into their strategies to create higher returns and satisfy their investors—who also want big returns. The same is true in private equity, sovereign wealth funds, and the biggest banks in the world.

This makes the ALEC spin particularly odd as it tries to split ESG from its clear fiscal benefits through such language as “retirement funds are being invested for maximum growth and not being used to promote a political agenda.” That’s directly from the organization’s press release about this new model legislation.

ALEC’s goal through its “State Government Employee Retirement Protection Act” underscores its claims. A state pension plan must consider investments, ALEC says, “based solely on pecuniary factors that have a material effect on the return and risk of an investment” and not “unrelated objectives” or to “promote goals unrelated to those pecuniary interests of the plan’s participants and beneficiaries.”

Hidden Agenda

The true objective can’t be the economic interests of the pension funds and their participants and beneficiaries because ESG makes economic sense. The biggest and smartest investors in the country and, for that matter, the world increasingly see ESG as critical to managing risk and improving profits.

The real issue for ALEC isn’t financial success for state pension funds for a specific brand of conservative politics. There are two things the group is trying to knock out of line: the importance of environmentally conscious choices, which would upset large oil and gas corporate supporters of ALEC and worry about greater emphasis on social equity in the world, especially for marginalized groups, no matter how that could negatively impact pension funds.

The irony is that steps to keep pension funds from considering ESG will undermine sound financial choices by people whose careers are made or broken on their success in increasing value for pension holders.

On the surface, ALEC’s description almost seems reasonable. Which retirees would want the people controlling their pension funds to make choices that could reduce the money in the fund?

But there are two unstated and nonsensical assumptions in the proposed. One, that professional pension fund managers are likely to push for specialized political interests that have nothing to do with making money. The second is that ESG investment has no connection financial considerations. monetary decisions.

Public employee pension funds are among the biggest and most demanding investment organizations you can find. They are collectively responsible for the retirement incomes of millions today and into the future. They can’t afford to do less than well.

The Sovereign Wealth Fund Institute, which studies the investment funds of nations, pensions, central banks, and other huge institutional investors, has ratings of the hundred largest public pension funds around the globe—including state pension organizations such as the California Public Employees' Retirement System (CalPERS), with more than $500 billion in assets, the New York State Common Retirement Fund (CRF) with more than $278 billion, New York City’s retirement system holding $247 billion, Florida’s pension fund with almost $235 billion, the teacher retirement system of Texas with about $226 billion and others.

That’s just a sampling of the vast sums at play, larger than the holdings of most corporations, with people who must keep growing assets to support the pension requirements. This isn’t a place for political correctness. If strategies don’t work, the people behind them lose their jobs.

So why would any of these people have an interest in environmental issues? In social and human rights and humane treatment of others? The money-centric return on investment reasons that the smartest, savviest, and biggest investment groups on the planet increasingly have an eye on ESG are four in number.

One, if you don’t have a sustainable planet, you lose the ability to make a profit.

Two, as companies you invest in have to exist in the world, the ones mitigating their exposure to climate change will lower their risk and improve the chance of a profit.

Three, if you invest in companies that help reverse ecological damage, they’re going to make a lot of money and improve the chance of a profit.

Four, if you don’t keep the social aspects in view as the country’s demographics move toward a majority minority makeup, you’re antagonizing and repelling much of the future of business growth. Equality and inclusiveness of everyone isn’t a nicety. It’s a must to attract your potential customer pool, and, again, improving the chance of a profit.

If ALEC was really concerned about retirees, perhaps it should circulate model legislation that supports what major professional investors and money managers know, that ESG is good business and good for pensions.