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Kansas retirement investment advisers warn against aggressive legislative rebuttal to ESG activists

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TOPEKA – Investment advisers have urged the board of the Kansas Public Employees Retirement System to adopt a “stay the course” approach in the face of growing demands to change institutional portfolios to match political ideas on energy policy, the climate change and the carbon economy.

Advisers acknowledged the rising temperature of people on the political left and right, but warned that requiring or banning investment in certain companies could hurt the financial performance of KPERS’ $24.8 billion portfolio. They warned that transferring KPERS portfolio management functions from investment management firms BlackRock or Mellon to an internal model could decrease the bottom line of the state pension system.

KPERS provides retirement, disability, and death benefits to state, school, and local government employees in Kansas. The pension system has more than 325,000 members.

Concern has arisen primarily at BlackRock, the world’s largest asset manager, after the firm’s Chief Client Officer Mark McCombe went public with BlackRock’s stance on energy investments versus pension funds. . Nearly 20 state attorneys general, including Kansas Attorney General Derek Schmidt, have denounced McCombe’s views and the so-called ESG movement, in which partisan activists seek to shape portfolios around environmental ideals, social and governance.

Schmidt and the other attorneys general disputed BlackRock’s claims that it was energy agnostic and disputed claims that BlackRock was simply marketing alternative investment options in the energy sector.

“BlackRock appears to be using the hard-earned money of the citizens of our states to circumvent the best possible return on investment,” Schmidt and the other attorneys general said of BlackRock. “BlackRock’s past public engagements indicate that it has used citizen assets to pressure companies to comply with international agreements such as the Paris Agreement that mandate the phasing out of fossil fuels, increase energy prices, drive inflation and weaken the national security of the United States.”

The 2023 Kansas legislature is expected to debate bills comparable to a 2021 Texas law barring most state entities from entering into contracts with companies that have banned or curtailed investment in the oil and gas industry. The same restrictions could be enacted by lawmakers regarding gun companies or other types of businesses drawn into political debates.

Attorney General Derek Schmidt joined 18 attorneys general opposing the plea by investment manager BlackRock, which owns $4.5 billion of KPERS’ portfolio, to align investments with moving away from fossil fuels. (Tim Carpenter/Kansas Reflector)

Fiduciary duties

Allan Emkin, managing director of Meketa Investment Group and general consultant to KPERS, and Bruce Fink, chief investment officer of KPERS, said the black-and-white letters of Kansas law and the board’s investment policy were bulwarks against the political manipulation of the pension. system portfolio. BlackRock and Mellon were selected by KPERS to manage a large portion of the Kansas Retirement System portfolio, but the companies operate under the same KPERS strategic guidelines despite differing public stances on ESG.

Emkin and Fink said BlackRock, which manages $4.5 billion of KPERS holdings and has spoken out on the ESG movement, is a trustee of the state pension system and obligated to comply with the state law and board policy governing portfolio decisions.

Under Kansas law, no money in KPERS may be invested “if the sole or primary purpose of the investment is economic development or social goals or purposes.”

KPERS board policy states that the fundamental responsibility was “to invest the assets of the system prudently only for the benefit of members and beneficiaries” – not to achieve political objectives. The board’s policy also states that investments should be “prudent” and “provide the highest expected return at the lowest expected risk and be diversified appropriately”.

Jo Yun, administrator of KPERS and vice president of finance and chief financial officer of Reach Healthcare Foundation in Overland Park, posed the question directly to Emkin.

“I firmly believe that if politics is good, let politics work,” Yun said. “Our mission is to provide the best possible return to our members with the lowest risk. Do you think our investment policy sets out the process for that to happen? »

“I think politics makes huge sense, and so does law,” Emkin said.

Emphasis on proxy votes

Emkin said the area where ESG rose to prominence was in proxy voting, where decisions were made by investors about a company’s board or corporate governance. KPERS delegates thousands of such votes to BlackRock every year.

However, Emkin said lawmakers and others considering the issue should understand that BlackRock is the largest holder of ExxonMobile, one of the largest publicly traded international oil and gas companies in the world. He said BlackRock’s approach to ESG activism has more to do with the belief that the movement could impact the risk and return of portfolios. He said analysis of BlackRock’s proxy votes did not reveal a radical statement of social activism.

“If you look at their proxies, their proxies everywhere are based on each company’s unique facts and circumstances,” Emkin said.

Fink said investment managers are required to vote proxies in the best interests of their clients — KPERS, in this case — and to follow the policies and laws applicable to those clients.

He said bringing in in-house staff to handle tens of thousands of proxy votes each year would have a cost for KPERS and that moving away from BlackRock or other large institutional management firms was not a guaranteed positive return on investment.

“It could definitely be done,” KPERS CFO said, “but I would like to come back to the cost factor. It would take staff to trade that account, run that account. It’s also not without operational risk.

Questions China, Hong Kong

Anxiety also surfaced over KPERS’ investments in China and Hong Kong through listed companies and private stocks. KPERS documented $486 million in public holdings in China and Hong Kong, or 10% of the system’s international portfolio. There were about $41 million in private equity investments with exposure to China, he said.

In a chat with KPERS directors, Emkin said he thinks all of his clients are having conversations about the world’s second-largest economy and the political complications associated with it. There are investment opportunities in China and China’s withdrawal signals could be the best, he said.

“It’s everywhere,” Emkin said. “The challenge is that emerging markets are China-based directly or indirectly, as are a large number of American companies that have significant business relationships and whose profits come largely from selling to China or use of goods and services from China.”

He said the tension between China and Hong Kong was not as simple as responding to investments held by KPERS in Russia after the invasion of Ukraine. In March, the KPERS board voted to halt all new investment in Russian securities.

“It’s not Russia,” Emkin said. “It was easy to solve the Russia problem because you had virtually no stake and that market was really irrelevant. China is relevant in all sorts of different ways.

Alan Conroy, executive director of KPERS, said he expects China and BlackRock issues to be topics of conversation among House and Senate members after the start of the legislative session in January. .

He said the Republican-led Legislature, working with Democratic Governor Laura Kelly, could pass laws governing KPERS investment decisions.

He said one of the goals of KPERS trustees would be to share information with lawmakers about the relevance of global policy considerations to the pension system. This conversation between KPERS administrators at a meeting last week was a step towards engaging in a comparable dialogue with the Legislative Assembly, he said.

“The more you limit the investments there, there’s at least a fair possibility that could ultimately impact the return. As a decision maker, I think they’ll have to be aware of that,” Conroy said.