Kentucky Retirement System Trustees Say It Is Not Subject to State's Anti-ESG Law

The County Employees Retirement System says it is unable to comply with a new Kentucky law requiring state agencies to disassociate with companies that boycott the energy sector because doing so would be “inconsistent with its fiduciary duties.”

Last month, Kentucky State Treasurer Allison Ball released a list of financial companies that she said are engaged in boycotting energy companies. She said that under the new law, Senate Bill 205, which passed in April 2022, state agencies—including the state’s pension funds—are required to notify her if they own direct or indirect holdings of the companies on the list. Any state agency that has holdings in the companies is required to send a notice to those companies demanding that they halt any energy boycott or face divestment.

However, in a special meeting on February 8, the trustees of CERS—which represents 64% of Kentucky Retirement System members—approved a letter to the state’s treasurer saying that SB 205’s requirements would force CERS to breach its fiduciary duties. The trustees said CERS is therefore not subject to the law’s requirements.

In the February 13 letter to Ball, CERS board chair Betty Pendergrass wrote that “CERS has determined that the requirements set forth in [Kentucky Revised Statutes] 41.470 to KRS 41.476 are inconsistent with its fiduciary responsibilities with respect to the investment of CERS assets or other duties imposed by law relating to the investment of CERS assets, thus, per the law, it is not subject to the notification and other requirements set forth in KRS 41.470 to KRS 41.476.”

Kentucky SB 205 defines an energy company boycott as the refusal to deal with, ending business activities with or otherwise seeking to penalize a company because it “engages in the exploration, production, utilization, transportation, sale or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law.” The law also applies to a “boycott” of companies that do business with such a company.

The law defines a state governmental entity as any “state board, bureau, cabinet, commission, department, authority, officer or other entity in the executive branch of state government that makes investments, deposits or transactions” of more than $1 million annually.

The Kentucky Retirement Systems include CERS, the Kentucky Employee Retirement System and the State Police Retirement System.

The list of companies targeted by Ball includes BlackRock, BNP Paribas, Citigroup, Climate First Bank, Danske Bank, HSBC, JPMorgan Chase & Co., Nordea Bank, Schroders, Svenska Handelsbanken and Swedbank.

“Our responsibilities to our members and our fiduciary duties are clearly defined in federal law and state statute,” a spokesperson for the Kentucky Public Pensions Authority, which manages the systems, said in an emailed statement to CIO. “We have and will continue to uphold those responsibilities and fiduciary duties.”

A spokesperson for Ball did not immediately respond to a request for comment.