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Investment standards debate moves into state legislatures

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(The Center Square) – Environmental, social and governance investment standards are a hot topic among Republican lawmakers across the U.S. who see it as a political move to force a progressive agenda.

Democrats, on the other hand, see it as a smart investing strategy.

Oklahoma is the latest state to attract national attention to ESG investing, even though the Legislature passed a bill regarding it last year. State Treasurer Todd Russ published a list of 13 financial institutions banned from doing business with the state of Oklahoma earlier this month because of their ESG policies regarding fossil fuels.

Those 13 companies have 90 days to tell the state it has stopped boycotting energy companies. And if they haven’t stopped their boycott, the law grants the state six months to divest itself of 50% of investments with the financial company and a full year to divest 100%.

In Tennessee, Gov. Bill Lee signed a bill that prevents the state’s treasurer from investing state funds based on ESG. The bill’s fiscal note states it will not significantly impact state or local revenues.

Some Republican states are raising concerns and sometimes rejecting bills banning ESG-related policies.

The North Dakota House of Representatives rejected a bill that would have required the North Dakota Department of Financial Institutions to monitor banks for ESG policies. The bill would have cost the state about $1.7 million, with most of that going to salaries for additional bank examiners.

The Arkansas Legislature also discussed possible fiscal implications when discussing a bill similar to Oklahoma’s, requiring the state to divest from financial institutions with ESG standards. The treasurer would also have to maintain a list of those financial institutions. Gov. Sarah Huckabee Sanders signed the legislation.

Fiscal concerns have not deterred every state from opposing ESG standards. Indiana Gov. Eric Holcomb signed House Bill 1008, which prohibits the board of trustees of the Indiana public retirement system “from making an investment decision with the purpose of influencing any social or environmental policy or attempting to influence the governance of any corporation for nonfinancial purposes.” It also requires the pension board to make investment decisions “solely in the financial interest of the participants and beneficiaries of the system for the exclusive purposes of providing financial benefits to participants and beneficiaries and defraying reasonable expenses of administering the system.” This despite concerns concerns the state could lose $6.7 billion in investments.

Utah Attorney General Sean Reyes, Alabama Attorney General Steve Marshall and Illinois State Treasurer Michael Frerichs testified before the U.S. House Oversight Committee earlier this month. Frerichs told the panel that ESG was simply data used to make investment decisions. Treasurers and comptrollers from Colorado, Connecticut, Delaware, Massachusetts, New York City, Oregon, Vermont and Washington state issued a statement backing Frerichs’ testimony.

“The truth is simple. More data on risk leads to stronger returns for retirement accounts over the long term,” they said. “Ignoring risks to focus on short-term gains is not aligned with the needs of millions of Americans saving for retirement or their families’ education. But it is aligned with a short-term outlook to boost corporate profits. That’s why we’re hearing such loud and manufactured outrage against responsible investing.”

While Republicans are banning financial institutions with ESG investment standards, Democratic-controlled states are embracing policies.

New York lawmakers are considering a bill establishing a Green New Deal task force. The task force would develop a “detailed statewide, industrial, economic mobilization plan for the transition of the New York economy to become greenhouse neutral by 2030.” One of the bill’s goals is to promote “economic and environmental justice and equality.”

Washington state lawmakers are considering a bill that would require “the state investment board publicly report on the climate-related financial risk, social responsibility, and proxy voting and corporate governance policies within its private and public market portfolios, including the alignment of the fund with the Paris climate agreement and Washington’s climate policy goals.” The legislation has yet to be heard in committee.

In Arizona, the Republican-majority Legislature passed a bill banning banks from using a “social credit score” when making lending decisions. Democratic Gov. Katie Hobbs vetoed the bill, calling it ambiguous as it doesn’t define a “social credit score.”

And in Illinois, Democratic lawmakers passed a bill that requires investment managers of Illinois public funds, including pension systems, to disclose how they integrate environmental, social and governance policies into their investment strategies. The bill is set to be sent to Democratic Gov. J.B. Pritzker.

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