Two bills are currently working their way toward becoming law in Kansas and South Carolina, aiming to prevent their respective state and local governments from incorporating environmental, social and governance principles when investing.
Kansas lawmakers have approved a bill that would prevent the state government, its pension funds and school districts from using ESG principles in investing their funds or when awarding contracts. The Protection of Pensions and Businesses Against Ideological Interference Act would require the Kansas Public Employees Retirement System to divest from financial companies that engage in “ideological boycotts or other discriminatory conduct.”
The bill would require the state treasurer to prepare, maintain and provide to the KPERS board a list of all financial companies that engage in so-called “ideological boycotts,” which is how the bill refers to companies’ divestment based on ESG principles. The treasurer would rely on publicly available information regarding financial companies and request written verification that the company does not engage in “ideological boycotts.” A financial company that fails to provide the treasurer with written verification 31 days after receiving the request would be presumed to be engaged in an ideological boycott.
However, an analysis of the bill conducted by the Kansas Division of the Budget found that it would reduce the expected returns of the Kansas Public Employees Retirement System by 0.85%, or $3.6 billion, over the next 10 years, compared with the current investment portfolio. The analysis also estimated that it would reduce KPERS’ funded ratio by approximately 10% and lower it to the same funded level it had a decade ago.
“However, the actual long-term cost effect to KPERS would depend on the extent of the required divestment and restructuring of the investment portfolio,” the analysis stated.
The bill now heads to the desk of Kansas Governor Laura Kelly, a Democrat. Although Kelly has not publicly commented on whether she will sign the bill into law, fellow Democrats voted against the legislation in the Republican-controlled Kansas Legislature.
Meanwhile in South Carolina, the state’s House of Representatives passed the ESG Pension Protection Act. The bill requires South Carolina’s retirement system to consider only “pecuniary factors” when making investment decisions and prevents it from considering ESG factors.
The bill would also require the state’s retirement system to exercise shareholder proxy rights for shares that are owned directly or indirectly on behalf of the system. To accomplish this, the retirement system would have to manage the proxy voting in-house, hire an external proxy adviser or fully delegate the proxy voting to an external investment manager.
According to a fiscal analysis of the bill by the South Carolina Revenue and Fiscal Affairs Office, managing the proxy voting could cost the retirement system as much as $1 million if it does it in-house. It would cost the system $292,000 to hire an external proxy adviser, and delegating the proxy voting to an external investment manager would be of no cost to the retirement system. The report added that the retirement system is not sure which of the three scenarios would fulfill the requirements of the bill.
After passing the state House of Representatives, the bill was sent to the state Senate and was referred to its finance committee.