A bill designed to prevent the state’s pension fund from working with asset managers that use environmental, social and governmental—or ESG—considerations in their investment strategies was advanced by the Indiana Senate Pensions and Labor Committee on Wednesday.
As it was originally written, House Bill 1008, authored by Rep. Ethan Manning, R-Logansport, was projected to result in a whopping $6.7 billion loss to the Indiana Public Retirement System, or INPRS, over the next decade. That number was based on the assumption that financial institutions would not be able to work with INPRS due to its hardline stance against ESG investing, according to State Treasurer Daniel Elliot.
That prompted lawmakers to make significant changes to the bill, including exempting private market funds, which make up about 15% of the state’s total pension investments, from the legislation. The amended bill also excludes the state police pension trust and the pension system’s defined contribution plans.
Manning said the revisions would reduce the fiscal impact to zero and clear up any confusion while keeping intact the original intent of the legislation.
“The big idea here is that financial returns trump all, period, full stop,” Manning told the committee. “That’s the point of the bill. You can do all of the ESG funds and investing you want, but they have to have the highest returns, lowest risk and lowest management fees.”
The legislation also imposes reporting requirements on INPRS, requiring the agency to provide an annual count of all proxy votes made by fiduciaries.
Enforcement of the law would fall under the treasurer’s office, which some lawmakers found problematic.
Sen. Greg Walker, R-Columbus, who voted to advance the bill, questioned how the treasurer’s office was more qualified than the INPRS board to make determinations about ESG policies.
Elliot said that while INPRS is “doing a great job,” his office has staff members who are better equipped to more closely examine the pension system’s investments.
“They are making some important strides, but what they don’t have is an entity that’s answerable to the voters,” Elliot said, noting that he is an elected official. “I have uniquely qualified people to look at these investments and give us answers very, very quickly.”
Greg Ellis, vice president of energy and environment policy for the Indiana Chamber, called the bill “anti-free market” and feared the impact it might have on companies that consider expanding their operations in Indiana.
“We believe this picks winners and losers,” Ellis said. “We think this bill might have a chilling effect on the Indiana economy.”
Manning said that interpretation was a “deliberate misreading” of the legislation.
Groups representing gun manufacturers and fossil fuel companies testified in support of the bill, saying that banks and credit card companies have refused to work with them due to ESG policies.
“Every member of our industry has been turned down by credit processors,” said Christopher Lee, a lobbyist for the National Shooting Sports Foundation.
Pension fund managers including Blackrock, State Street and Vanguard have come under fire from Republicans at the state and national level for practicing ESG investing. ESG funds have exploded in popularity in recent years, partly in response to a desire from investors to put their money toward what are perceived as noble causes.
The committee advanced the bill with all three Democrats on the committee voting against the measure. The legislation heads to the Senate floor.
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That Ethan Manning with a straight face claims his original intent was to push highest return for investments … for a bill with a $6 billion cost to pension returns … says that either he’s a fool or he thinks we are.
The industries testifying give away what the original bill was all about – using the pension returns of Hoosiers to prop up certain industries.
The Senate version of this bill was much preferable. Why the Senate is even hearing Manning’s bill instead of depositing his bill in the nearest trash can is beyond me.
Joe B, That $6 billion number was absurd and estimated based on a mistaken interpretation of the original bill’s language, which I’ll grant you was not carefully written. That interpretation assumed the bill prohibited the pension funds from investing with any investment advisor that offered ESG funds. That interpretation would preclude the pension funds from investing in most actively managed funds, since most investment advisors offer some ESG funds. That inability to invest in actively managed funds — and the presumption the actively managed funds would outperform passive funds, in the future — was the basis for the $6 billion estimate. Clearly that wasn’t the author’s intent, and the bill was quickly rewritten to reflect that. But you continue to repeat this misinformation in your comments about this bill. The senate did not discard this bill because it’s important legislation to protect the financial interest of state pensioners.
I disagree that the author’s intent was misunderstood. Manning was quite willing to accept lower returns to favor certain industries and testified as much.
Here’s his quote “We have to push back against those ideas, and the available funds that we have to do that are large amounts of pension funds. INPRS has about $45 billion”.
What am I misunderstanding here? What is not clear? Did the companies who came to testify not further drive Manning’s intent and point home? This is the exact same thing that’s been done in Texas that has led to lower returns for their pensioners. We know this will cost us money… nevertheless, Manning persists.
As I’ve said elsewhere, I don’t care what funds the state invests in. Invest in what gets the highest return. If that’s gun and coal companies, fine. If that’s windmill and solar companies, fine.
Which is what INPRS policy has been and what Senate Bill 292 does. It actually has bipartisan sponsorship and passed over to the House already. The Senate bill is a much cleaner bill and it’s the bill that should be passed. Stop wasting time dignifying Manning’s bill with a response.
https://www.ibj.com/articles/anti-esg-bill-clears-financial-panel-with-new-5-5m-price-tag
Joe B, First, that $6 billion number was pure fantasy, based on historical returns. No one in this business, with a clue, makes investment allocation decisions based primarily on historical returns. Second, ESG is an investment policy that by it’s very design restricts opportunities for investing. So it can’t be expected to produce higher returns, in the future, than unrestricted funds, in which managers focus only on financial return, not ESG. And that’s what Manning’s bill calls for. Manning, himself, said his bill doesn’t restrict the pension funds from buying ESG funds as long as the pension fund can justify the investment in an ESG fund based on financial performance alone, not ESG. I don’t see how you can argue against that unless you’re just playing politics with what you hope to make a wedge issue by misinforming people.
“Second, ESG is an investment policy that by its very design restricts opportunities for investing. So it can’t be expected to produce higher returns, in the future, than unrestricted funds, in which managers focus only on financial return, not ESG. “
What will happen if that’s the case, if they don’t produce higher returns? Indiana will divest and move on to another fund. Simple. Easy. And already the policy of the state of Indiana.
Manning’s intent with this bill was, clearly, was to force the state of Indiana to preemptively walk away from funds if they divested from certain companies, to force them to invest as he wishes.
“Our state pensions should be focused on maximizing returns, not on furthering social or political interests that don’t have a material effect on financial risk or return. I don’t think that INPRS themselves have done anything wrong. I have not heard anyone say that. But as the legislature, we set the policy and we set the direction and we want to not only ensure that we’re focused on our financial returns, but also that these four critical industries are not experiencing any sort of discrimination by these large asset managers.”
You can’t have it both ways. Either you care about nothing but investment returns, or you run around picking winners and losers and protecting critical industries using the pensions of Hoosiers to do it. If you’d like to harp on people for misinforming and misleading, start with Ethan Manning.
https://www.indystar.com/story/news/politics/2023/01/17/indiana-house-gop-looks-to-join-anti-esg-movement/69800100007/
Joe B, No, the two objectives Manning is referring to are not mutually exclusive. They represent the supply side and the demand side for capital, respectively. Our state pension funds are supplying capital through investment funds for firms and industries that demand the capital, to invest in real assets. ESG funds prioritize extremely flawed ESG measures over expected future financial performance, in security slection, thereby sacrificing potential returns to pensioners, and steering capital away from industries with low ESG scores, such as energy, construction, etc. Restricting investment in ESG funds doesn’t “prop up” any industry, for the love of Pete! It merely allows the capital to flow based on expected financial performance rather than ESG scores. It’s the ESG funds that pick winners and losers by actively steering capital away from certain industries.
Steven, I can’t square your statements with Manning’s clear intent with his original bill using his own words.
If the “four critical industries” are such a great investment, someone will start a fund with those industries (because there’s money to be made) and states like Indiana will invest in those funds because they deliver the highest return.
If ESG funds are making bad choices, they will be punished when Indiana pulls their funds because there are other funds producing better returns.
This legislation is just as bad as legislation that would force divestiture of Indiana’s pension funds from gas and coal. All Indiana should care about is what results are delivered, not how. Put the money in the funds with the highest funds. Stop letting part-time legislators with political agendas risk pension funds.
I’m old enough to remember when Indiana was a two-party state. Bills like this would likely not even been introduced. We desperately need an independent, bi-partisan commission to oversee drawing of districts. I’ll pause here to allow my Republican friends to laugh their asses off.
James, What exactly is your problem with this bill? To anyone knowledgeable about investing, it clearly is in the interest of the clients of these state pension plans, as well as important industries adversely effected by ESG funds.
You must be really ancient, James. Indiana hasn’t been credibly a swing state since like the Truman Administration. There’s no such thing as an “independent, bi-partisan commission”. They’ll always be tainted because no one is non-partisan and everyone can get corrupted by money. Districts will get drawn and redrawn when the political winds favor the replacement party–that’s just life.