A group of 21 Republican attorneys general is sending a warning to investment companies and other firms that are pushing environmental, social, and governance factors (ESG) when making decisions on behalf of retirees. The AGs’ message: Stop, or legal action could follow.
After the congressional effort to counter ESG was halted by President Joe Biden’s pen, officials in different states have set into motion efforts of their own. Treasurers are working hand-in-hand with lawmakers to enact legislation that counters ESG and clarifies the law for state pension funds. Attorneys general like Montana’s Austin Knudsen are pursuing a different route, sending a letter Thursday warning investment companies that their behavior does not comport with existing law.
“ESG has no business in our state investments. The state investment board and all those asset managers, they owe a fiduciary obligation to the Montana pensioners and to everyone in our investment system. Under that fiduciary obligation, they have an obligation to maximize profits,” Knudsen told National Review.
“That’s what pays retirements for the firefighters, retired police officers, teachers, and state employees in the state of Montana,” he said. “So that’s what needs to be driving the decisions that these asset managers make, not whether or not Amazon is using plastic, not how robust is Albertsons’ diversity, equity, and inclusion policies.”
Many states have sought to clarify existing laws to reinforce the fiduciary obligation and increase transparency in the proxy voting system, through which state pension boards often delegate the thousands of votes that need to be cast in a given year. These boards delegate to asset-management firms, which in turn often delegate the proxy to advisory firms that make recommendations. These recommendations from the advisory firms often align with ESG principles.
Montana is simply seeking compliance with existing law.
“The teeth that I’m looking at as Montana’s chief law-enforcement officer is ‘Are they following the law?’ When you’re handling state assets and investing state funds, our state law is very clear; you are acting as a fiduciary,” continued Knudsen. “These two things are mutually exclusive: Woke policies do not equal me following my fiduciary obligation.”
The Montana attorney general said the investment companies will be given time to comply with state laws that require this approach to investing.
“What we’re looking at right now is coming at them under state law if we need to. That’s why we sent the letter. We’re hoping to send a warning and let them know we’re watching. Hopefully they correct their ways, and we don’t have to go down that road,” Knudsen said, adding that if he does go that route, he’ll be looking at filing a legal case based on Montana statutes.
Knudsen explained that what’s motivating this effort is that these companies are not going through the ballot box to change the laws.
“What’s angering me is that this is stuff they can’t get through the Congress, this is stuff the can’t get through the Senate, this is stuff they can’t get through the state legislatures, and that’s where this stuff should come from,” Knudsen said.
“You don’t come in and do it through the back door and through pressuring companies by your woke liberal interests. . . . If you want to change the law, go change the law, and then what you’re doing will be just fine. But doing it this sneaky, underhanded way by [pursuing] some of this absolutely out-of-touch radical stuff, that’s gonna hurt Montana,” he said.
Knudsen said not only is the ESG push opposed to the values of Montanans, but it is also incompatible with Montana’s position as an energy state
“We’re actually very, very similar to a West Virginia. We’re a coal state. We’re an oil-and-gas state. We’re a net energy exporter in Montana, and some of the most solid investments that we have for our state pensioners are in those companies,” Knudsen said.
The letter that Knudsen signed was sent on Thursday to more than 50 asset-management firms including BlackRock, Goldman Sachs, and J.P. Morgan Asset Management. In addition to Knudsen, Utah’s Sean Reyes and Missouri’s Andrew Bailey are among the letters signatories.
The AGs are specifically concerned with “the ongoing agreements between asset managers to use Americans’ savings to push political goals during the upcoming proxy season.”
“As far as we can tell, your non-ESG funds do not disclose to investors that their investments will be used to further ESG goals, including pressuring companies to reduce emissions in economically destructive ways,” the letter reads.
“The 2023 proxy season will present multiple occasions on which asset managers will have to choose between their legal duties to focus on financial return and the policy goals of ESG activists,” the letter continues, pointing to specific proposals relating to social issues such as abortion and environmental issues like net-zero compliance that will be voted on.
The letter from the attorneys general also follows a federal lawsuit filed by Texas and joined by 24 other states, including Montana. The lawsuit challenges the Department of Labor’s rule permitting ESG on the grounds that it violates ERISA, the federal statute that requires the fiduciary obligation. This is the rule that bipartisan coalitions in both chambers of Congress succeeded in disapproving of through the Congressional Review Act. However, there is not enough support to overturn Biden’s veto.
That case is pending in federal court.