Testimony Before the Louisiana Senate Committee on Retirement in Support of SB 5
Cameron Sholty, Executive Director
Heartland Impact
April 2, 2024
Chairman Price and Members of the Committee,
Thank you for holding this hearing on SB 5, the Public Pension Fiduciary Duty Act, which 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[i] or underperformance.[ii]
My name is Cameron Sholty, and I am the executive director of Heartland Impact. Heartland Impact is the advocacy and outreach arm of The Heartland Institute. Both are independent, national, nonprofit organizations working to discover, develop, and promote free-market solutions to social and economic problems. Heartland specializes on providing state lawmakers the policy and advocacy resources to advance free-market policies towards broad-based economic prosperity.
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 Public Pension Fiduciary Duty Act declares that the term “financial” means “having been prudently determined by a fiduciary to have a material effect on the financial risk or the financial return of an investment” and shall not “include any action taken, or factor considered, by a fiduciary with any purpose whatsoever to further social, political, or ideological interests.”
Further, SB 5 states a fiduciary may have been determined to take an action, or considered as a factor, with a purpose to further social, political, or ideological interests…beyond what controlling federal or state law allows” if it forces a company to eliminate, reduce, offset, or disclose greenhouse gas emissions, or by “instituting or assessing corporate board, or employment, composition, compensation, or disclosure criteria that incorporates characteristics protected in this state.”
SB 5 also considers a social, political, or ideological factor “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 “any company that engages in, facilitates, or supports the manufacture, import, distribution, marketing or advertising, sale, or lawful use of firearms, ammunition or components parts and 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.”[iii]
Considering Louisiana is the nation’s third-largest producer of natural gas and eleventh-largest producer of crude oil, ESG scoring has the potential to devastate the Pelican State economy.[iv]
Legislators should also take note of the implications ESG investing could mean for Louisiana’s agriculture sector. A recently released report from Ohio’s Buckeye Institute has found that operating expenses for farmers under an ESG reporting system would increase by 34 percent, leading to more expensive groceries.[v] Items like American cheese (79 percent), beef (70 percent), strawberries (47 percent), and chicken (39 percent), just to name a few examples, would increase significantly.[vi] Overall, the report estimates a 15 percent total increase in household grocery bills if ESG scoring is allowed to be implemented.[vii]
Critics of anti-ESG legislation have charged that bills such as the Public Pension Fiduciary Duty Act 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 Louisiana, Pelican State legislators would be perpetuating this distorted marketplace, and nothing in the bill forces Louisiana fiduciaries to use uneconomical investment options.
Also, contra to what the Actuarial Note for SB 5 says, requiring the fund to invest for the benefit of plan participants rather than for the ideological predilections will increase returns and reduce costs, not the opposite. Many other states have passed fiduciary duty bills similar to the Public Pension Fiduciary Duty Act, including Arkansas, Kansas, Kentucky, and West Virginia last year. None of those states have reported a negative financial impact, and certainly not an impact anywhere near what the Actuarial Note estimates. Of course, the note does not refer to any of these states in its analysis.
By clarifying the fiduciary duties of Louisiana’s pension fund managers, and by insisting that maximizing the return on investment for clients be their only guiding principle, Pelican 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. To do this, you must pass the Public Pension Fiduciary Duty Act.
Thank you for your time.
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.
[i] Sanjai Baghat, “An Inconvenient Truth About ESG Investing,” Harvard Business Review, March 31, 2022. https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing.
[ii] Brian Ponte, “Sustainable US funds suffer brutal fourth quarter in 2022,” Financial Times, February 10, 2023. https://www.ft.com/content/153c8555-e4d0-4c59-88f0-368656fbb3ad.
[iii] Heritage Action for America, “Myth vs. Reality: Indiana’s Bill to Combat ESG (HB 1008),” February 1, 2023. https://heritageaction.com/blog/myth-vs-reality-indianas-bill-to-combat-esg-hb-1008.
[iv] U.S. Energy Information Administration, “State Profile and Energy Estimates: Louisiana”, last updated June 15, 2023, https://www.eia.gov/state/?sid=LA.
[v] Trevor W. Lewis and M. Ankith Reddy, Net-Zero Climate Control Policies Will Fail the Farm, The Buckeye Institute, February 7, 2024. https://www.buckeyeinstitute.org/library/docLib/2024-02-07-Net-Zero-Climate-Control-Policies-Will-Fail-the-Farm-policy-report.pdf.
[vi] Ibid.
[vii] Ibid.
