Legislation in the Wyoming House of Representatives would combat environmental, social and governance (ESG) scoring systems and ensure state pension funds are invested solely to achieve the maximum return on investment for pensioners, rather than advancing social or political causes that may likely lead to lower returns and financial underperformance.
ESG scores are essentially a risk assessment mechanism increasingly being used by investment firms and financial institutions that forces large and small companies to focus upon politically motivated, subjective goals which often run counter to their financial interests and the interests of their customers. Companies are graded on these mandated commitments to promote, for example, climate or social justice objectives. Those that score poorly are punished by divestment and reduced access to credit and capital.
To prevent this, the bill declares a state fiduciary shall not take any action with an investment that furthers a “social, political or ideological interest.”
Further, a fiduciary “may reasonably be determined to have taken an action, or considered a factor, with a purpose to further social, political or ideological interests based upon evidence showing a fiduciary commitment to further, through portfolio company engagement, board or shareholder votes or other actions as a fiduciary or a trustee, any of the following actions beyond what state or federal law requires,” including “eliminating, reducing, offsetting or disclosing greenhouse gas emissions,” “divesting from, limiting investment in or limiting the activities or investments of any company for failing or not committing to meet environmental standards or disclosures,” or “divesting from, limiting investment in or limiting the activities of any company that engages in, facilitates or supports the manufacture, import, distribution, marketing, advertising, sale or lawful use of firearms, ammunition, components, parts or accessories of firearms or ammunition.”
As Heritage Action for America notes, “using asset managers that engage and vote shares based on ESG can reduce the value of pension fund assets over the long-term. For example, [the world’s largest investment firm] Blackrock has voted against directors for failing to set emissions reduction targets or for increasing exposure to fossil fuel assets such as coal. In 2020, Blackrock voted against the directors of a utility for increasing its exposure to coal related assets, even though such exposure would no doubt have been financially beneficial. Such actions prevent companies from making money during periods when being anti-ESG is profitable. Over time, this will reduce the value of pension fund assets.”
The bill also limits the ability of a fiduciaries to make use of proxy voting. “Proxy voting” refers to the process by which shareholders in a corporation can vote on company matters such as the election of directors, executive compensation, mergers and acquisitions, corporate governance policies, and shareholder proposals such as on environmental policy or “sustainability” practices without attending a shareholding meeting in person. Shareholders can appoint a proxy—often a person or entity—to cast their votes according to their instructions.
However, a 2024 report from the Life:Powered initiative of the Texas Public Policy Foundation notes, “in recent years, environmental activists have taken advantage of this process to insert their politics into corporate decision-making. They do this by purchasing stock in public companies and forming coalitions with other shareholders to introduce shareholder resolutions and nominate new board members, copying the decades-old practices of activist hedge funds. But unlike the hedge funds of old, these activists are operating not under a financial rationale but under a political rationale, attempting to influence companies to support progressive policies on issues ranging from climate change to abortion. It is rational for companies to weigh in on policies and regulations that directly affect their finances and their ability to do business. But, while the activists usually claim there is a financial rationale for their actions, forcing actions on issues that are so far removed from a company’s balance sheet detracts from the ability of executives to make decisions that will produce the highest financial returns for their shareholders.”
Glass Lewis and ISS hold more than 90 percent of the market share for proxy voting advisory services and, according to the report, “have become major ESG promoters because the increasing number and complexity of shareholder resolutions from ESG activists increases the demand for proxy advising and related services.”
While some state public pension systems like the California State Employees’ Retirement System (also known as CalPERS) and California State Teachers’ Retirement System (CalSTRS) have rushed headlong into ESG investing, most have not. Still, many have been passively advancing these ESG investing trends due to proxy advisers like Glass Lewis and ISS. This is concerning because public pension systems are some of the largest institutional investors in the world, with assets north of $5.8 trillion.
Critics of anti-ESG legislation have charged that bills such as this distort the free market and could possibly lower a state’s credit rating. However, the true distortion is being perpetrated by those seeking to use the financial agencies as de facto governmental regulators. By allowing ESG to gain a foothold in Wyoming, Cowboy State legislators would be perpetuating this distorted marketplace, and nothing in the bill forces Wyoming fiduciaries to use uneconomical investment options.
By clarifying the fiduciary duties of Wyoming’s pension fund managers, and by insisting that maximizing the return on investment for clients be their only guiding principle, Cowboy State legislators can help ensure the long-term fiscal health of the state’s pension systems and make sure that promises proffered to state pensioners will be kept.
Heartland Impact can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Cameron Sholty, at csholty@heartlandimpact.org or 312/377-4000.
