Two Kentucky retirement systems have chosen to reiterate their existing investment policies to two state officials who are seeking confirmation the systems do not integrate ESG considerations into their investment management decisions.
The two boards overseen by the Kentucky Public Pensions Authority, Frankfort, have approved letters in response to the requests from State Treasurer Allison Ball and Attorney General Daniel Cameron, who are both Republicans.
The Kentucky Public Pensions Authority oversees the $7.9 billion County Employees' Retirement System, as well as the Kentucky Retirement Systems, which consists of four other state pension funds with a total of $4.6 billion in assets. CERS and KRS have separate boards of trustees that vote on investment decisions.
In an Oct. 31 letter from the state officials to David Eager, KPPA's executive director, Ms. Ball wrote that she had recently asked Mr. Cameron whether investment practices integrating environmental, social and governance practices are consistent with Kentucky law "governing fiduciary duties owed by investment managers to Kentucky's public pensions."
According to the letter, Mr. Cameron said "such practices violate statutory and contractual fiduciary duties." The letter further requested that Mr. Eager advise Mr. Cameron's office about his systems' efforts to ensure that "ESG considerations are not being implemented in your systems' investment decisions, consistent with Kentucky law."
The investment committees of both systems had previously approved a two-page joint letter reiterating the investment policy statements. In a Dec. 1 board meeting, the Kentucky Retirement Systems' board voted instead to delegate the authority to KRS CEO John E. Chilton to draft a separate letter thanking the officials for their letter and simply referring them to the KRS investment policy.
In a webcast of the meeting, Mr. Eager said, "We do not apply ESG rules to eliminate broadly companies, like all oil companies or tobacco companies or whatever. Some of those factors do come into play in typical ongoing analysis of any equity securities, so if they have violations or concerns or their practices that we think are going to diminish the financial profitability, we'll take it into consideration but other than that, we … don't apply those standards broadly."
In the ensuing discussion, trustees began to question the need for a two-page letter, which included information regarding the systems' proxy-voting policies.
"I would just commend our staff for the reasoned and appropriate approach that they take in the letter. I completely agree with (C. Prewitt Lane, vice chairman of the board) that in these cases we're being asked to be parties to the politicization of an issue that doesn't really involve us, and I would encourage us not to engage any more than we absolutely have to," said David Adkins, trustee with the board and executive director/CEO of the Council of State Governments. "It is clear like critical race theory that ESG is now the flavor of the month for being a punching bag in the culture wars, and we don't have to accept that framing of the issue. ESG is not the enemy. It is not the devil waiting behind the corner. It is an attempt to say that investing decisions and bottom-line definitions of returns can consider something more than just dollars on a spreadsheet. And I think in the world in which we live, and the risks we confront and very real challenges that those risks present to us that those companies and those investment firms that choose to pursue ESG policies should not be vilified, nor should we necessarily feel like we have to enter into that debate."
Mr. Adkins said that if ESG results in better returns for the systems' beneficiaries, then "by God, we want that to be one of the tools in our toolbox. So I don't mean to tell anybody to go pound sand, but we just don't need to be caught up in what is going to increasingly be one of a litany of issues that are grievance-based that have nothing to do with solving problems of advancing the interests of our beneficiaries.
"I would have (sent) a very short and sweet letter back to the AG thanking him for his input and that we got this," Mr. Adkins said. "This is a political, pure political issue that has nothing to do with the merits of it. And I don't need to be drug into that."
Mr. Eager responded, "I couldn't agree more, and I've been fighting this battle for 30 years."
Trustees agreed to draft the letter saying they intend to follow the law and provide a copy of the investment policy.
At its Dec. 5 meeting, the County Employees' Retirement System's board approved the draft letter included in meeting materials, according to a webcast of that meeting.
"I think we've taken the position that we simply want to be perceived as responsive as we possibly can to the request that's been made from our elected officials," said Ed Owens III, CERS CEO, at the meeting.
In the draft letter, Mr. Owens noted that the board at its Nov. 10, 2021, meeting amended its investment policy with a passage in which "the CERS Trustees recognize the importance of responsible investing."
"Accordingly, the Trustees acknowledge that integrating Environment, Social, and Governance (ESG) policy principles that engage the issue from a risk, opportunity and fiduciary duty perspective will enhance investment results. The overriding consideration for the Trustees will continue to be investing to maximize the long-term returns for plan beneficiaries," according to the amendment.
Further, Mr. Owens in his letter writes, "The investment policy is designed to acknowledge that in some instances considering ESG factors may minimize risk or highlight opportunities but must always be done with an eye toward the unwavering fiduciary duty owed to every member of the Plan. The policy is emphatic. The overriding consideration for every investment will be the decision which enhances the long-term return for beneficiaries."
