S.C. Gov. McMaster signs ‘ESG Pension Protection Act’

South Carolina Gov. Henry McMaster signed the ESG Pension Protection Act — which requires the state pension fund’s decisions be based on maximizing returns — in a ceremony at the governor’s office.

The bill, H.3690, was officially signed by the Republican governor on Feb. 5 and went into effect on Feb. 9.

The bill directs that all investment decisions made by the South Carolina Retirement System Investment Commission (RSIC) be based solely on maximizing the highest rate of return and not on factors such as environmental, social and governance.

“South Carolina’s economy continues to break records thanks to our conservative, fiscally responsible approach,” McMaster said Wednesday during the signing ceremony.

“This bill — which passed with overwhelming bipartisan support — is yet another example of our commitment to responsible financial stewardship and will safeguard the interests of our retirees and taxpayers from the liberal ESG agenda,” the Republican governor said.

“The goal of this bill is to take the politics out of the pension investments of South Carolina,” said State Rep. Bill Taylor, chief sponsor of the legislation.

“This legislation ensures very simply that we make money for those who are in the state pension program,” Taylor said. “We want them to have a happy and fulfilling retirement with money in their pockets — not to be subverted by those worshipping the liberal gods of ESG.”

The law lists factors for the RSIC to consider when investing and managing assets, including:

• General economic conditions;
• The possible effect of inflation or deflation;
• The role each investment or course of action plays within the system’s portfolio;
• Need for liquidity, regularity of income and preservation or appreciation of capital; and
• The adequacy of funding for the plan, based on reasonable actuarial factors.

The law also requires the RSIC to adopt a statement of investment objectives and policies for the retirement system.
The statement has to include an overall rate of return goal for the portfolio, a desired rate of return and acceptable levels of risk for each asset class, asset-allocation goals and a statement that all investment decisions must be based only on pecuniary factors.

The RSIC has exclusive authority for investing and managing all assets held in trust for the participants and beneficiaries of the five state-defined benefit plans.

“South Carolina’s business is business and this is another example of how we’re taking care of business,” McMaster said. “We’re thinking ahead and reflecting the will of the people of South Carolina who are loaded with common sense.”

Taylor said the legislation showed that both sides of the aisle could come together with both Republicans and Democrats agreeing on issues that matter to residents.

“Just the title alone of ‘ESG,’ you would think would draw the critics,” he said. “In reality, the House voted 103 to 5 to pass this bill. It went to the Senate and it was passed unanimously, without debate. Nearly every legislator voted in favor of protecting the value of our state’s pension programs.”

National implications
Taylor praised the state treasurer and attorney general and their staffs as well as two conservative think tanks, the Heritage Action for America and the Hartland Institute.

“Getting a bill to the governor’s desk for signature is a daunting task, it is never really very easy,” he said, adding they all helped get it done.

“This bill was the first ESG bill signed into law this year and with its enactment South Carolina becomes the 16th state to pass similar legislation to protect the assets of those investing from being used to just further political agendas,” said James Quarles, state director for Heritage Action for America.

He said 28 states introduced bills last year on ESG issues, more than double the number from the prior year.

Taylor said while there would be no real change for the retirement system — they don’t use ESG criteria now to make investment decisions — it codifies that policy so it can’t happen in the future.

There is more to come on the ESG front, he said.

“In the Senate they are working on the banking and the insurance aspects of all of this,” Taylor said, adding he expects to see a bill introduced in the next few weeks.

Seeing red over green
South Carolina isn’t the first red state to take on ESG criteria.

In June, the North Carolina General Assembly overrode Gov. Roy Cooper’s veto of House Bill 750, which removed ESG considerations from state pension plan investment decisions.

The bill, which seeks “to increase compliance by counties and municipalities that fail to timely submit an annual audit report,” was vetoed by Cooper, who said its enforcement provisions were too harsh for smaller localities to bear. Cooper, a Democrat, is often at odds with the Republican-controlled legislature.

In Alabama, Republican Gov. Kay Ivey in June signed a law to limit the use of ESG factors by private-sector businesses.

The bill, passed by the GOP-dominated state legislature, bars state and local government entities from signing contracts with businesses “that refuse to deal with” or “take any commercial action intended to penalize,” companies involved in the fossil fuel, timber, mining, agriculture, and firearms industries in the state.

This year, Republicans in the New Hampshire House of Representatives introduced a bill that would have prohibited using state funds in investments that consider ESG criteria. Violations would be a felony punishable by one to 20 years’ imprisonment.

“This bill prohibits the investment of funds of the state Treasury, executive branch agencies, and the state retirement system in investments that consider environmental, social and governance (ESG) criteria,” a summary of the text said.

Anti-ESG bills have made a comeback in Arizona and Oklahoma while Texas continues to cull underwriters from its municipal bond syndicate groups.

Other red states have followed Texas’ lead and enacted laws that have led to underwriter bans. Last year, the Oklahoma Treasurer’s Office created a list of fossil fuel boycotters. In Missouri, a trial over the state’s ESG investment rules will go ahead after a federal judge rejected a motion to dismiss.

Empire state of mind
It’s like a parallel world for pension funds in blue states.

The state of New York’s Common Retirement Fund announced on Thursday it will restrict its investments in eight oil and gas companies after a disclosure task force review of the companies’ readiness to transition to a low-carbon economy.

State Comptroller Thomas DiNapoli, trustee of the fund, said the action was part of a broader review of the transition readiness of energy sector investments that face significant climate risk.

The fund will be divesting $26.8 million of its corporate bonds and actively managed public equity holdings in Exxon Mobil, Guanghui Energy, Echo Energy, IOG, Oil and Natural Gas Corp., Delek Group, Dana Gas and Unit Corp.

DiNapoli also announced the fund met its initial goal of committing $20 billion to the Sustainable Investments and Climate Solutions program and set a goal of investing $40 billion by 2035.

With the initial review of energy companies’ transition readiness now completed, the fund will review other sectors, with major utilities the next phase.

DiNapoli also said the pensions would make no new private market investments in funds focused on the extraction or production of oil, gas and coal and modify its proxy voting guidelines to push for public companies to increase disclosure of their climate transition plans, risks and opportunities.

Big Apple blast
In New York City, Comptroller Brad Lander blasted the withdrawal by BlackRock, JPMorgan Asset Management and State Street Global Advisors from Climate Action 100+ on Thursday.
 
Climate Action 100+ is an investor-led initiative that aims to make large corporate greenhouse gas emitters take action on climate change.

“Climate risk is financial risk. Today, BlackRock, JPMorgan and State Street are choosing to ignore both,” Lander said in a statement.

“By caving in to the demands of right-wing politicians funded by the fossil fuel industry and backing out of their commitment to Climate Action 100+, these enormous financial institutions are failing in their fiduciary duty and putting trillions of dollars of their clients’ assets at risk,” he said.

“We can’t expect to preserve long-term value for beneficiaries when we are lighting our investments on fire. Securing strong, long-term returns requires real world decarbonization on the timeline of the Paris Accords,” he said.

The city, he said, would be evaluating its options.

“We are in the process of reviewing how well our managers are aligned in that approach and will consider our options for the management of our public market investments,” Lander said.

Earlier this month, Lander and trustees of three of the five city pension systems filed shareholder proposals with big banks requiring them “to live up to their own rhetoric on achieving net zero implementation plans by fully reporting their ratios of clean energy to fossil fuel finance.”

The police and fire pension funds are not involved in any of the actions by the three other city employee systems.

“Despite all their talk, the big banks have made little progress in the energy finance transition over the past couple of years,” Lander said.

The proposals build on the systems’  climate action proposals  outlined in their net-zero implementation plans, which includes engaging with portfolio companies, including those in the finance sector, in order to reduce financed emissions.

In December, Lander said the retirement systems increased their investments in climate solutions by 24.7% in fiscal 2023, bringing the city’s retirement portfolio of climate investments to $10.5 billion as of June 30. In total, all five funds have $253 billion in assets under management and are the fourth-largest public pension plan in the United States.