06 Mar PUBLIC PENSION CORNER, #34: The American Way
NEWS:
I. NZAM Relaunches, Largely Without American Support
The Net Zero Asset Managers initiative – which suspended activities just over a year ago, after BlackRock joined other American asset managers in leaving the coalition – has relaunched itself, with easier membership requirements and still without much American participation:
The Net Zero Asset Managers initiative relaunched on Wednesday with more than 250 members after a year-long suspension, but fewer U.S. companies signed up….
The group performed a six-month review before releasing a new “commitment statement” without an explicit requirement for members to align their investment portfolios with net-zero by 2050 or set a 2030 target….
Despite the new rules, only 12 U.S. companies rejoined, compared with 44 U.S. members at the time of the suspension. Others, such as State Street Investment Management and Wellington Management, signed up only for their European businesses.
II. California Sets August Deadline for Emissions Reporting
The California Air Resources Board (CARB) voted last week to adopt the regulatory text for the implementation of the state’s two high-profile and highly controversial emissions reporting laws:
SB 253, the Climate Corporate Data Accountability Act, requires companies that do business in California with over $1 billion in revenue to report their greenhouse gas emissions. This year that will include companies’ scope 1 and scope 2 emissions, and companies are expected to report to the state by Aug. 10.
SB 261, or the Climate-related Financial Risk Act, requires companies that do business in the state with over $500 million in revenue to disclose climate-related financial risk reports to the state. The original submission deadline was Jan. 1. However, enforcement of the law is enjoined by litigation in the Ninth Circuit of Appeals, so any compliance for companies is voluntary at this point, CARB said in an enforcement notice. Over 120 companies have voluntarily submitted reports to the public docket as of Feb. 27, according to ESG Dive’s review of the database.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“The American Way”
Our friends at the Labor Department’s Employee Benefits Security Administration (EBSA) were back in Paris at the Organization for Economic Co-operation and Development (OECD) this week, and they were, once again, the voices of sanity on the matter of pension fiduciaries’ responsibilities to their clients. Last September, you may recall, Justin Danhof, Senior Advisor to the EBSA, addressed the OECD and made it clear that the administration’s position is that ESG investing is, in most circumstances, a violation of U.S. law. Moreover, he continued, ESG constitutes a gift to the world’s bad actors, who seek the destruction of OECD member economies by any means possible:
ESG is not just some side-bar political or policy issue. It’s about sovereignty and security as well. Authoritarian leaders love when our member nations embrace ESG. Why? Because it lessens your prosperity and makes you less competitive. If America and other OECD member companies hamstring our nations’ capital markets and pension systems with superfluous ESG costs, it only serves to benefit authoritarian regimes that do not engage in such frivolity.
This week, the topic was slightly different – not ESG specifically but ideologically motivated divestment from Israeli companies and their American partners. Likewise, the messenger was different – not Danhof but his colleague and fellow senior advisor to EBSA, Jack Lund. Still, the fundamental message was the same: mixing politics and pension investments is foolish, dangerous, and, under American law, illegal. Making the case that even small things matter because they eventually snowball into much bigger, much more important things, Lund put it this way:
[O]nce any purpose or goal, other than the exclusive purpose of protecting workers, is allowed to infect decision-making on pension investment, this divestment monstrosity is what awaits you at the bottom of the metaphorical slippery slope. It starts with a sacrificial offering to DEI (diversity, equity, and inclusion)—investing with managers based on irrelevant personal characteristics rather than the content and performance of their portfolios. Then it becomes an obsession with trying to solve the world’s climate issues through the global financial markets. And, before you know it, your pension system has been hijacked by people who have no more sympathy toward their victims than any other hijacker.
The way to prevent this explosive ending is by prohibiting, altogether, the consideration of factors other than the provision of retirement benefits. That is precisely how our system is designed. This is accomplished through two parallel or interlocking provisions of law. The first, our landmark retirement statute, known as ERISA, requires that fiduciaries responsible for the management of private retirement assets act “for the exclusive purpose of . . . providing benefits to participants and beneficiaries.” The second, in our Internal Revenue Code, makes certain generous tax benefits contingent on retirement plans being managed “for the exclusive benefit” of the participant-employees or their beneficiaries.
Together these provisions require managers of American retirement benefit plans to invest to maximize risk-adjusted return on that investment to the exclusion of all other factors. Managers who deviate from this framework risk personal legal liability, including criminal penalties in the most egregious cases, and jeopardize the tax qualification of the plans which they manage.
Now, obviously, Lund’s discussion is about private pension plans, those covered by ERISA. Nevertheless, his points apply equally to public pension plans. Those who use those plans to advance goals other than the “exclusive benefit” of pensioners violate their duties to those pensioners.
Recently, Randi Weingarten, the president of the American Federation of Teachers, bragged that she had written to the CEO of Target, demanding that the company join her effort to get “ICE out of Minnesota.” More specifically, she threatened to leverage what she claims are 7 million shares of Target owned by teachers’ pension funds around the country to force the company to comply with her demands. This is aggressive and aggressively political stuff.
The good news is that Randi Weingarten doesn’t actually control any of those shares. She can yell and scream and bounce up and down all she wants, but she is not a fiduciary. She cannot exert any direct influence whatsoever on those shares of Target. The better news is that the people who can exert direct influence are people like you, gentle reader, who understand that your first and most important duty is to your clients, the people whose interests you are empowered and required to protect.
That, in the end, is the brilliance of the American pension systems – both public and private. For the most part, they insulate control of investments from overtly political actors and their whims. And if the rest of the OECD adopted similar standards, their pensioners would be far better off than they are now.
