House Republican leadership appears poised to dive into culture war issues again when the legislative session starts in January, setting a target on ESG investing—or environmental, social and government-focused investing—within the Indiana Public Retirement System.
House Speaker Todd Huston, R-Fishers, declined to comment on the topic for this article but felt strongly enough about the investment philosophy to include it in his floor speech on Organization Day in November.
“We want—particularly within our pension funds—our pension fund managers to be focused on return on investment and not on energy and social policies,” Huston said.
Forbes defines ESG strategy as investing in companies that score highly on environmental and societal responsibility scales as determined by third-party independent companies and research groups. Advocates for ESG investing argue that they should use their investment funds in a way that reflects their values. Opponents say that results, not dogma, should drive investment strategies.
The practices of the state employee retirement system have been restricted before, most recently when Indiana divested from Russian companies following the country’s invasion of Ukraine, which cost pensioners more than $200 million.
But INPRS officials declined to answer specific questions about what an ESG ban could mean for their agency.
“…INPRS makes investment decisions based on our return and risk objectives, as allowed by state and federal law,” an INPRS spokesperson said. “INPRS will comply with all laws established through the federal and state legislative process. If the law changes at any time, INPRS will adjust our internal processes to comply with the change.”
What is ESG investing?
Visiting Assistant Professor David Shin, who specializes in ESG investment research at Indiana University, noted that there was no set criteria defining ESG investing in the industry, meaning investment firms can define it however they want.
“Even if they say, ‘We are ESG friendly,’ their behavior may not be ESG focused,” Shin said. “For example, many financial institutions offer ESG-related products for their clients but they may do so simply to attract more fund flows … we don’t have any consensus as to the definition of ESG (investing).”
Rather, ESG is one of a myriad of approaches investment firms can take when it comes to deciding how to divvy up their funds. The environment factor could evaluate the company’s impact on the environment while the social aspect could focus on whether the company invests in the community. In terms of governance, investors could focus on company operations or executive compensation.
Shin’s research indicates that many so-called ESG funds place an emphasis on environmental or social aspects over corporate governance, which has been a longstanding strategy. The term originates from a 2004 United Nations report in which the former Secretary General invited CEOs at 55 of the world’s leading financial institutions to become responsible investors.
“After (that), people were naturally more interested in ESG factors,” Shin said. “I think officially, the United Nations could be the very first sort of agency or international organization to start ESG.”
The second big shift in ESG policy, Shin said, came in 2019 from an association of major U.S. CEOs, known as the Business Roundtable, which urged placing stakeholder input on par with shareholder value maximization. Previously, getting big returns for shareholders was the only priority.
“This was a big, big change in the corporate world because their purpose changed,” Shin said. “(One reason why may be) taking care of other stakeholders might also be good for fund value maximization … other reasons might be people emphasizing human rights (and) equal rights.”
Research on whether ESG investing performs worse than traditional investment approaches is mixed. Shin said some research showed that ESG funds attracted better fund flows and more customers than conventional funds but performed roughly the same.
“We can’t say ESG investing is increasing or decreasing (fund) value; we need more research,” Shin said. “We have mixed evidence on strong returns.”
Shin couldn’t say whether ESG investing was occurring more in public funds or private funds, since data on private funds is limited. Still, the approach is growing in popularity.
“According to the Global Sustainable Investment Association, ESG investing was $22.8 trillion in 2016. That number becomes $30.6 trillion in 2018 and increases to $35 trillion in 2020,” Shin said. “So in terms of absolute value, ESG assets have been growing steadily.”
What could legislation look like?
While no bills have formally been introduced this session, an anti-ESG bill filed earlier this year might hint at the broader strokes.
House Bill 1224 would have prohibited the investment of state employee retirement funds into financial companies that boycotted certain energy companies and even included a portion stipulating that agency contracts couldn’t have contracts with those companies.
Bill author Rep. Ethan Manning, R-Logansport, sponsored that bill, which passed the House on second reading but didn’t move forward after that.
Manning didn’t respond to an interview request but confirmed in a statement that he would explore the issue again in the upcoming session.
“… Coal and natural gas continue to be predominant energy sources for electricity production in Indiana and these companies and their suppliers need access to capital and services in order to provide the fuels that power the Hoosier economy,” Manning said in a statement. “Moving ahead, I look forward to continuing these discussions during the 2023 legislative session to find the best way forward for our state and those we serve.”
Introducing HB 1224 in committee in January, Manning said banks, investment firms and insurance companies were discriminating against fossil fuel companies, but emphasized that the bill didn’t force companies to do anything.
“(This) is technically about government investments and contracts, but what this bill is really about is the reliability of our electric grid … and who sets energy policy,” Manning said at the Jan. 25 meeting.“It is my view that we cannot sit idly by and allow these companies to get away with harming Indiana energy companies and Hoosiers themselves by making poor decisions not based on financial returns but on some political philosophy and pressure from activists.”
Former Rep. Terri Austin, D-Anderson, noted that similar bills had been pushed by ultra-conservative organizations nationwide. She said she had reservations about imposing such a mandate on universities and local units of government–even if there was no enforcement mechanism.
“… the truth of the matter is, as a free market state and as people who believe in the free market and the system of capitalism, should we be telling our financial institutions and our corporations what they can and cannot do through their board of directors anyway? As long as it’s not criminal,” Austin said.
She added that, to many, divesting in fossil fuels could be considered a long-term investment in a future with renewable energy sources.
“Why in the world are we trying to punish people for making wise investments or at least trying to make decisions that they think are future oriented?,” Austin asked.
Manning said businesses could choose “to make social change,” but did so at the risk of losing business with the state of Indiana and its local governments.
The bill passed the committee on a 7-5 vote, with two ‘no’ votes from Manning’s fellow Republicans and two of the ‘yes’ votes saying they had their own reservations, indicating a tough path forward if a similar bill is introduced in the 2023 legislative session.
Though last year’s version didn’t include an enforcement mechanism, committee members openly speculated about whether the attorney general would bear that responsibility–something the current officeholder, Todd Rokita, would appear to relish.
In numerous press releases this year, Rokita has decried the actions of investment firms “imposing woke ideologies … (and) potentially causing harm to investors and consumers.”
He claimed that the approach prioritized leftist ideals over financial returns, something adherents rebuff.
“So-called ‘ESG investing’ purports to be concerned with environmental, social, and governance issues,” Rokita said in a November release. “The advocates of this approach claim their activism does not interfere with making money, but they are deliberately trying to mislead the public about their ploys to subvert the will of the people for the sake of ‘progressive’ politics.”
Increased Republican focus
Many of the arguments made by Manning echo national conversation, which has only grown since Manning introduced the bill in January.
Sources told Axios over the summer that the U.S. House GOP, if they won the majority, would seek testimony from CEOs of investment firms utilizing ESG investment approaches. In addition to Rokita, 18 other attorneys general have asked the Securities and Exchange Commision to investigate BlackRock, the largest investment firm pursuing ESG Investing.
“When American workers invest in their retirement, they should be able to trust their financial advisors to be investing with their best interests in mind, not the interests of liberal activists,” Braun said in a statement last month. “I am proud to lead my colleagues in this effort to overturn the Biden administration’s woke 401k rule and protect Americans’ retirement funds.”
Earlier this month, the Florida Treasury divested $2 billion of state funds from BlackRock, propelling the movement against ESG Investing. But groups all over the nation have railed against the movement–from Evangelical Christians in Tennessee to Fox News personality Tucker Carlson.
However, a full ban might end up costing states. A study of Texas found that the state’s entities paid an additional $303 million to $532 million in interest due to decreased bond competition following a prohibition on ESG investing.
The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.