The Kansas public pension fund estimates that it would lose $3.6 billion through diminished returns over a 10-year period under proposed state legislation prohibiting the fund from considering environmental, social and governance risks when making investment decisions.
Lawmakers serving on the state Senate Federal and State Affairs Committee, seemingly taken aback at the estimates, agreed during a March 8 hearing to put the brakes on Senate Bill 291, introduced two days prior, while it is revised.
"I think before we even decide to work on this bill, we'll get the parties back together and see what we can do … to allay anyone's fears," the committee chair, state Sen. Mike Thompson, told the panel.
The warning from the Kansas Public Employee Retirement System, or KPERS, followed similar pushback from Indiana's state retirement fund, which recently projected a loss of more than $6.7 billion from anti-ESG legislation in that state. The Indiana bill has since been amended, which reduced the projected fiscal impact to $5.5 million in extra costs but left the legislation with a smaller scope by excluding private equity and hedge funds from many of its provisions.
The growing resistance from retirement funds, as well as commercial banks in red states, suggests that the campaign targeting investment practices that look at "non-pecuniary" factors such as climate risks may face an uphill battle. Anti-ESG laws were expected to be a shoo-in for passage this year in Republican-led states after several influential conservative groups with ample funding set out to squash an investment philosophy in use at many corporations today.
"It's an estimate, but $3.6 billion is what our investment professionals think it could potentially be," KPERS Executive Director Alan Conroy told Kansas lawmakers at the hearing on S.B. 291. "That wipes out $1.5 billion in bonding that this legislature had done in the last 10 years, and it would wipe out another $1 billion that we're considering putting into KPERS this year."
Lawmakers had moments earlier recalled how they bailed out the state pension system after it teetered on the edge of bankruptcy following the financial crisis in 2008. The Kansas fund has more than 333,000 members, described as "public employees," police and firefighters, and judges. In its 2022 fiscal year, it paid out more than $2 billion in retirement benefits.
On March 7, Kansas Attorney General Kris Kobach and State Treasurer Steven Johnson testified in support of S.B. 291, which they said would prevent investment strategies that penalize the state's oil and gas industries, firearms manufacturers, and other "politically incorrect" sectors.
"Instead of looking at every company to see what can yield maximum return on investment, they're pushing them off the table," Kobach testified. "As a result, ESG-driven [funds] had lower returns in the past year."
S&P 500 indexes do not bear that out, although some other index funds have shown that tech-heavy ESG funds lost ground in the last year.
Kobach also cheered a provision of the bill requiring investment advisers and stock brokers to disclose to private investors that they may invest in ESG funds that "may limit your return on investment."
BlackRock Inc. and other large asset managers have rejected the notion that they are not serving the best interest of their clients, noting that they continue to invest in fossil fuels. Investment managers and advisers are required by federal law to fulfill certain duties as fiduciaries of their clients' investments.
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