Texas lawmakers are moving forward with a bill barring public pension funds from considering environmental, social and governance investment criteria, even though the director of one state fund estimated that the change would lead to up to $6 billion in losses.

The head of the $45 billion Texas County and District Retirement System, which provides retirement benefits to 345,000 people including nurses, road crew workers and sheriffs, recently warned legislators that private asset managers would hesitate to do business with it over legal concerns should the bill become law. That, in turn, would force the pension system to contract with other and perhaps less qualified firms, officials said.

"We're worried that conflicts in the bill would keep us from partnering with some of the best investment managers in the world over issues such as violation of fiduciary duty and protecting competitive advantage," Amy Bishop, the pension system's executive director, told state senators at a March 27 hearing.

Noting that the fund has never had an official ESG policy, Bishop said employer pension contributions would have to double to more than $1 billion annually to make up for a $6 billion loss over the next 10 years if the bill is enacted.

Texas taxpayers would also have to foot a $1.2 million bill over five years for increased administrative and employment expenses for the state Pension Review Board, according to a state fiscal analysis. The board would be required to produce new reports and hire two new employees tasked with setting up new reporting requirements and developing guidance to meet the new ESG reporting requirements.

The author of the bill, Republican state Sen. Bryan Hughes, revised the legislation in recent days, but the updated bill text has not yet been disseminated. His bill, S.B. 1446, cleared a committee vote on April 6 and will next be heard by the full Senate. A spokesperson for the pension fund said in an email that it will evaluate the revised bill and its impacts when it becomes available.

The legislation, along with a separate bill titled S.B. 1060 that targets ESG policies within the insurance industry, is the outcome of a December 2022 hearing Hughes held with executives from asset managers BlackRock Inc., State Street Corp. and others. The executives were questioned for hours over their investment policies.

The Texas pension bill requires investment managers to only consider financial factors, prohibiting them from considering any action "with a purpose of furthering social, political or ideological interest." Investment managers must commit in writing that they will meet such requirements and will not be allowed to cast proxy shareholder votes on behalf of the pension fund unless they have a voting policy focused solely on maximizing financial return.

A pension system will also be allowed to sue an investment manager that is not complying with the law, although the defendant would only be charged with attorney fees if it loses the case.

"The thread running through all this" is investing for return for retirees as opposed to politics, Hughes told the March 27 hearing.

In its analysis of the original bill, the pension system assumed it would have to remake its portfolio to focus more on public equities and high-yield bonds, resulting in a 1.5% decrease in portfolio value over 10 years.

Ind. legislation revised

A similar bill in Indiana, with an initial fiscal impact estimate of $6.7 billion, has been amended in recent weeks to exempt banks and some other holdings in an effort to mitigate its economic impact, although the legislation still includes asset managers. On April 11, Indiana lawmakers also deleted a section requiring the state treasurer to keep a list of companies it believes has ESG policies.

"We're still opposed to the bill because we don't like how the legislature picks winners and losers," Greg Ellis, an energy and environmental policy lobbyist for the Indiana Chamber of Commerce, said in an interview. "They have a whole laundry list of prohibitions, like divestment from fossil fuels."

With less than three weeks remaining of the legislative session, whether Indiana lawmakers will have time to get the bill out the door is uncertain, Ellis said.

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