Oklahoma PERS weighs next move in tussle over ESG-blacklist law

The board of trustees of the $11.1 billion Oklahoma Public Employees Retirement System is scrambling to respond to Oklahoma Treasurer Todd Russ in an escalating squabble over a law requiring public pension funds to cut ties with firms perceived to be hostile to the oil and gas industry.

Russ sent the board a scathing 17-page letter rebuking it for its decision to take a fiduciary exemption from having to comply with the law. The letter, provided to Pensions & Investments by Russ' office, had not been previously disclosed.

"The board's actions were in opposition to the letter and the spirit of EDEA," Russ said in the letter, referring to the Oklahoma Energy Discrimination Elimination Act, the law implemented in 2022 to punish firms for factoring environmental, social and governance issues into their investment decision-making.

Russ chastised the board for "continuing to entrust approximately $7 billion in state pension assets to BlackRock and State Street," two of six firms that state pension plans are prohibited from doing business with because Russ put them on a blacklist euphemistically referred to as the "list of restricted financial companies."

In August, the OPERS board voted in favor of a move that would prevent it from having to terminate contracts with the blacklisted firms. The board opted to take an exemption permitted under the law that allows state governmental entities to essentially ignore any requirement they determine is inconsistent with their fiduciary duty.

The board voted 9 to 1 in favor of the exemption, with Russ — who serves on the board — casting the only vote against the exemption.

The board now is looking to craft a response to Russ' letter. At a meeting Oct. 19, the board authorized board Chair Brandy Manek and Vice Chair Grant Soderberg as well as the chair of the investment committee, Andy Schallhorn, to respond to the letter.

The board expects to have a response within the "next couple of weeks," said Joseph Fox, OPERS' executive director, in an email.

In the letter, Russ took issue with the requests for proposals that OPERS issued in July seeking possible replacements for BlackRock and State Street on eight investment funds. Russ alleged that five of the eight funds had "zero or near-zero switching costs" and that the three remaining funds required additional analysis.

OPERS staff had determined that an investment case could not be made for dropping BlackRock and State Street, saying that the asset managers were more advantageous from a pricing and performance standpoint than any of the bidding firms.

OPERS also estimated that it would cost about $10 million to transition the funds plus an additional amount in "implicit costs" that could be determined only after the transition had taken place.

Russ blasted the RFP process as incomplete, biased and rushed, and demanded that the board "immediately begin a new RPF process."

"The RFP process demanded responses in three weeks for several multibillion-dollar deals," he said in the letter. "Last year, a similar RFP for a single type of fund allowed bidders six weeks to respond."

Russ also ridiculed the board for using Verus Investments, its investment consultant, to the evaluate RFP submissions, noting that the firm advocates for ESG regulatory mandates.

"OPERS put Verus in charge of overseeing a high-profile attempt to move billions of dollars away from ESG-focused asset managers who are fellow collaborators in the ESG movement," Russ said. "Unsurprisingly, Verus' reports all pushed OPERS toward staying with BlackRock and State Street, the two largest and most notorious ESG-promoting asset managers."

At its meeting Oct. 19, the OPERS board authorized a special committee appointed by Manek to issue a request for proposal to hire an investment consultant, law firm or accounting firm to review its RFP process in July.

"The board would have to take final action before hiring any such entity," Fox said.

State legislators now are considering tweaks to the controversial legislation. During a three-hour hearing led by state Sen. David Rader on Oct. 11, Russ pushed for changes to the legislation that would clarify or walk back the fiduciary exemption.

"If the bill is important to the state of Oklahoma, it's got to be clear enough that it's defensible. Otherwise, we won't change one penny of our position financially for the state," Russ said.