Gov. Ron DeSantis has made good on his promise to steer Florida’s state pension funds away from investment managers pushing a “woke” agenda by considering the environmental, social, and environmental consequences of investments.
But an investment expert predicted in an interview with the Phoenix that Florida’s new policy will have zero effect in deterring investors from making these considerations because they can be material to whether an investment is sound.
“With this issue of ESG integration, that horse has left the barn and it’s in the next county and the barn has burned down and a new one has been built. That’s ages ago; it’s kind of settled. This is just about getting the best data to make the best decisions. That’s all it is,” said Matt Orsagh of the CFA Institute, which trains financial advisers.
DeSantis announced his initiative in July, and the State Board of Administration (which includes the governor, Attorney General Ashley Moody, and Chief Financial Officer Jimmy Patronis, all Republicans) came through during this week’s Florida Cabinet meeting.
The governor casts the ESG movement as an effort by “woke” capitalism to foist policies upon the public that they couldn’t obtain at the ballot box. His initiative could keep the state from doing business with such investment giants as BlackRock Inc., Vanguard Group Inc., and State Street Corp., which control $20 trillion.
“I want to have the values not of Davos imposed upon us, but of places like Destin and Dunedin, where I grew up. Things like the World Economic Forum — those policies are dead on arrival in the state of Florida. We are not going to go down that road,” DeSantis said. That Swiss city is the site where the business elite gathers for conferences every year.
He added that he’ll ask the Legislature to codify the new policy in law. “You’ll look at who ultimately gets hurt by some of this nonsense, it is the people that have earned these pensions,” the governor said.
Additionally, he wants to coordinate with other states “to be able to pool our power, our voting power on these stocks, so that we can be a counterweight to ESG throughout the country,” he said.
The United Nations launched the ESG movement during the mid-2000s to promote corporate responsibility.
SBA interim director Lamar Taylor argued during the Cabinet meeting that power has shifted to major money funds as individual and institutional investors (like pension funds) have trended toward passive investment strategies — relying on these funds to place their money.
Additionally, under President Joe Biden the U.S. Department of Labor has encouraged consideration of companies’ effects on climate change and social factors when considering whether investments are truly sound, as opposed to merely remunerative, Taylor said.
“We think that it’s important for the trustees today to take formal action and unequivocally and formally confirm that the financial-return objective of the pension plan should never be subordinated to the political, social, and ideological viewpoints of others,” Taylor said.
Under the new policy, the board when deciding where to place the $227 million in the Florida Retirement System, plus investments for local governments and the Florida Hurricane Recovery Fund, can consider only “pecuniary factors” — defined as “a factor that the board prudently determines is expected to have a material effect on the risk and return of an investment based on appropriate investment horizons consistent with the fund’s investment objectives and funding policy.”
The policy stipulates: “Pecuniary factors do not include the consideration of the furtherance of social, political, or ideological interests.”
The trouble is that such factors do affect the health of an investment, the CFA’s Orsagh said, and therefore are information material to investors, defined by the U.S. Securities Exchange Commission as posing “a substantial likelihood that a reasonable person would consider it important.”
According to Orsagh, ESG factors include how well a company governs itself — is there cronyism in the leadership, for example; whether it’s causing societal harm by, say, manufacturing in sweat shops; and damaging the climate. These considerations are material to a company’s prospects in a changing world.
“You can take climate change seriously as an issue or not, but Florida is going to be gone in 80 years. It’s just going to be gone. That’s a real issue that we know is going to happen if we just stay on this trajectory. That’s not wokeness; that’s just looking at the data and seeing what it tells us,” he said.
National sovereignty is another consideration.
“What folks in the United States sometimes lose sight of is that most of these companies that we all invest in are global companies. And the United States is not the only place where regulation is made. And, especially on these ESG issues, if we just say we’re not going to do any of this, it’s going to be done for you in Europe,” Orsagh said.
As for the critics, “what they’re essentially saying is they’re happy with Europe setting our regulatory agenda,” he added.
“A pension plan is looking at how do we serve our clients over the long term. And the answer is by getting all the information we can to make the best decisions. And if that information happens to be environmental or social or governance, if it’s material they’re going to put it in their spreadsheets and their thought processes.
“And it’s part of their fiduciary duty to do so,” he said. “If you’re telling me I can’t consider some material information, well then I’m violating my fiduciary duty.”
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