by NICK LORIS
Earlier this week, South Carolina governor Henry McMaster signed into law H 3690, which requires state pension fund officials only consider financial factors when making investment decisions. On its face, this seems perfectly reasonable, and what we should expect from those managing the retirement funds for much of the state’s workforce.
However, in both its language and its intent, the bill is the latest example of a dangerous trend toward government overreach that politicizes investment funds at the risk of pensioners and taxpayers by preventing fund managers from considering all relevant financial factors in their decision-making process.
Across the country, state governments have been passing bills designed to limit investment criteria and restrict responsible investment practices. These policies target so-called “ESG” investing — an umbrella term for anything related to environmental, social, or governance issues within companies — but they show that policymakers actually misunderstand the concept.
While critics mistake investors’ sustainability considerations as a strategy to impose ideology rather than achieve financial goals, it’s clear that these considerations can have significant financial ramifications. If, for example, investors are concerned that a company’s facilities are at severe risk of damage from extreme weather and the company is failing to properly prepare for those impacts, they should be free to consider that risk however they best deem fit as part of their larger investment strategy. Just look to the recent Lowcountry flooding for an example of the damage extreme weather events can cause to buildings, infrastructure, and commercial assets. Many large international and national companies that are investing and creating jobs in South Carolina have ESG goals and anti-ESG legislation could send mix signals to companies wanting to do business in South Carolina.
“Pension funds in Kansas and Indiana are expected to lose $3.6 billion and $6.7 billion…”
Unfortunately, this misunderstanding of what are actually prudent investment considerations has resulted in legislative mandates that establish bans on the use of any ESG criteria — creating market distortions, reducing economic freedom, and creating an overly politicized approach to investment practices that is at odds with free-market principles. It is not the role of the government to tell investors to ignore those risks and opportunities by banning or mandating certain types of investment strategies.
Free-market principles drive innovation, boost productivity, and ensure economic efficiency. So it’s no surprise to us that the states that have passed bills to restrict investment criteria are already experiencing several costly impacts.
Pension funds in Kansas and Indiana are expected to lose $3.6 billion and $6.7 billion respectively as a result of restrictive investment policies. Elsewhere, cities and towns find themselves facing significantly higher interest rates, because they are being banned from working with certain investment managers.
In all cases, these policies represent a troubling approach to capital markets that abandons both free-market principles and the fiduciary duty of investment managers. In effect, many of these laws serve to undermine the well-intentioned goal of maximizing the value of retirement accounts and state pensions. Professional investors should be allowed to do what they do best: assess risks and opportunities free of government overreach.
That’s why C3 Solutions released a letter with nine other signers, including National Taxpayer Union, R Street, and American Action Forum, sharing a set of principles that protect investment policy from politicization while upholding fiduciary duty and driving economic growth, innovation, and environmental progress.
The fact of the matter remains that it is unfair and financially unwise for any state to put its taxpayers or its hardworking retirees at risk simply to score political points in an election year.
ABOUT THE AUTHOR …
Nick Loris is the Vice President of Public Policy at C3 Solutions. Loris studies and writes about a wide range of energy and climate policies, including natural resource extraction, energy subsidies, nuclear energy, renewable power and energy efficiency.
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