National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


ESG and Public Pensions: The Latest Legislative Developments

Sustainable investing will continue to roil our government for years to come. These issues are playing out not only in the halls of Congress and our regulatory agencies, but also in our nation's courts.
ESG and Public Pensions: The Latest Legislative Developments
By: Tony Roda, Williams & Jensen

On June 12, the House Judiciary Committee's Subcommittee on the Administrative State, Regulatory Reform, and Antitrust held a hearing titled, Climate Control: Decarbonization Collusion in Environmental, Social, and Governance (ESG) Investing. This is the most recent in a string of ESG-related hearings held by this Congress in the Republican-controlled House.

Previous hearings were held by the Oversight and Accountability Committee, the Financial Services Committee, and the Ways and Means Committee. Each hearing has explored a slightly different angle. For example, the Ways & Means hearing focused on whether trustees of tax-exempt organizations were investing trust fund monies in accordance with their duty under the exclusive benefit rule, which is part of their qualification requirements under the federal tax code.

Despite the different policies discussed in the hearings, each has followed a familiar script, with Republicans to a Member railing against woke capitalism and politically driven investing, and Democrats defending the use of a sustainability filter as a necessary part of the risk and return analysis that fiduciaries must employ to fulfill their legal responsibilities.

For its June 12 hearing the House Judiciary Committee's specific policy angle was whether antitrust laws have been broken in the pursuit of ESG investing. The day before the hearing the Committee's Republican majority released a 47-page report concluding that antitrust laws, indeed, have been broken, and sent the report to the Department of Justice for review and investigation. On the same day, the Committee's Democratic minority released a report finding that there is no evidence of collusive behavior or other antitrust violations.

Predictably, the hearing had its share of vitriol. Representative Harriet Hageman (R-WY) said that “…there's one reason why we have seen the [sic] prosperity in the last 100 years, that right that is [sic] never been rivaled in world history, and it's because of the commercial production of affordable energy. Every single one of you and your organizations want to destroy that. You are evil, and what you are attempting to do, and the violations of law that you are engaged in, is absolutely stunning…” Ranking Member Jerry Nadler (D-NY) remarked that the Committee's investigation is a “shadow campaign by the far-right and their allies in the oil and gas industry.”

Dan Bienvenue, Interim Chief Investment Officer of CalPERS, was one of the witnesses at the hearing. Bienvenue stated succinctly, “As a fiduciary and a long-term investor, CalPERS considers many risks to its portfolio. This includes climate-related risks. This is, in our view, neither a hard nor a controversial decision. To the contrary, it would be irresponsible for us to ignore factors that can fundamentally impact the long-term viability of investments.” His full testimony can be found here.

So, what comes next? It is extremely unlikely that the Biden Administration will initiate an investigation into antitrust violations based on the Committee's majority report. The real hope by Judiciary Committee Chairman Jim Jordan (R-OH), who vowed to continue the investigation, is that there will be a Republican in the White House next year and that the new GOP Attorney General will take up the cause. Also, there is an expectation among Republicans that private plaintiffs will emerge to file antitrust-based lawsuits.

Further hearings are also possible. In a related development, House Oversight Committee Chairman James Comer (R-KY) sent a letter on June 6 to Internal Revenue Service (IRS) Commissioner Daniel Werfel requesting the following information specifically regarding state pension funds:
  • The process used by the IRS to determine plans' compliance with the exclusive benefit requirements;
  • Copies of any guidance the IRS has published to ensure the exclusive benefit test is met by plan sponsors; and
  • The number of enforcement actions the IRS has taken against plan sponsors related to the exclusive benefit test in fiscal years 2018-24 along with a brief description of the facts and circumstances underlying the enforcement action.
This letter and the IRS's response could lay the groundwork for the next House hearing, possibly a joint hearing between the Oversight Committee and the Ways and Means Committee.

These issues are playing out not only in the halls of Congress and our regulatory agencies, but also in our nation's courts. Of particular note is a recent ruling by a federal district court in Oklahoma, which ordered a temporary injunction on the state's anti-ESG investing law, titled the Oklahoma Energy Discrimination Elimination Act of 2022. The law prohibits government retirement systems from investing in companies that boycott energy companies.

On May 3, 2023, the state's Treasurer placed 13 companies on the restricted list for boycotting energy companies. Subsequently, the Board of Trustees of the Oklahoma Public Employees Retirement System (OPERS) exercised an exemption to the law. OPERS estimated that the cost of commissions, taxes, and fees related to the divestment activity mandated under the law would cost the pension fund $9.7 million.

Then, in December, a beneficiary of OPERS sued the Treasurer in his official capacity on the grounds that the new law violated the Oklahoma Constitution. The federal district court on May 7 of this year ordered the temporary injunction noting in its opinion that plaintiff has a substantial likelihood of success in prevailing on the merits. Importantly, the court found that “…divestiture or transfer of assets and investments has the potential to affect the financial soundness of the investment accounts.”

Sustainable investing will continue to roil our government for years to come. There is no doubt that woke capitalism is a successful rallying cry and fundraising tool on the right. It also is true that, as it accelerates, climate change will fundamentally reshape investment challenges and opportunities.

Please be assured that NCPERS will keep its members apprised of significant developments in this public policy area.

Tony Roda is a principal at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Ohio, Tennessee, and Texas. Tony has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.



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