A battle over ESG may be brewing in Kentucky, where state Treasurer Allison Ball and Attorney General Daniel Cameron have requested responses from public retirement system boards of trustees to ensure they do not integrate ESG considerations into their investment management decisions.
One of those boards, however, may be arguing that doing so fulfills their fiduciary duties.
In an Oct. 31 letter from the state officials to David Eager, executive director of the Kentucky Public Pensions Authority, Frankfort, and Gary L. Harbin, executive secretary of the $24.6 billion Kentucky Teachers' Retirement System, also of Frankfort, 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 Messrs. Eager and Harbin advise their offices about their systems' efforts to ensure that "ESG considerations are not being implemented in your systems' investment decisions, consistent with Kentucky law."
Ms. Ball and Mr. Cameron requested responses on or before Nov. 23. The letter was included with Nov. 22 County Employees' Retirement System investment committee meeting materials posted on its website.
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 a letter post-dated Dec. 9 included with the Nov. 22 CERS investment committee meeting materials, Ed Owens III, CEO of the board of trustees, 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."
A KPPA spokesman said the KRS and CERS boards are in receipt of the Oct. 31 letter and are crafting responses to be discussed at their upcoming board meetings. In a Nov. 2 letter to Ms. Ball and Mr. Cameron also included with the Nov. 22 CERS investment committee meeting materials, Mr. Eager said the earliest the KRS and CERS boards could vote on the request would be at their Dec. 1 and Dec. 5 meetings, respectively.
TRS' Mr. Harbin, in a Nov. 22 letter provided by Robert B. "Beau" Barnes, deputy executive secretary and general counsel, responded to Ms. Ball and Ms. Cameron that "TRS investments follow the fiduciary duty to achieve the best returns within acceptable levels of risk — not to further environmental, social and governance objectives."
