DeSantis ban on ‘woke’ investments could hurt state pension fund, experts say

TALLAHASSEE — After banning CRT in the classroom and board room, Gov. Ron DeSantis has a new target in his culture war against “wokeness” with another acronym most folks have never heard of — ESG.

DeSantis says he views investment policies that take “Environmental, Social and Governance” issues into consideration as an existential threat to Florida’s people and economy, just as he sees Critical Race Theory undermining the state’s social and cultural values.

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“This is a movement to harness economic power to move an agenda that doesn’t have enough appeal to win at the ballot box,” DeSantis said on Aug. 23 after voting to ban investments in what he and others call “woke” investments. “Those policies are dead on arrival in the state of Florida.”

He and the other two members of the State Board of Administration Board of Trustees – Attorney General Ashley Moody and Chief Financial Officer Jimmy Patronis – passed a resolution ordering the state to prioritize “the highest return on investment for beneficiaries, without consideration for non-pecuniary beliefs or political factors” when considering future investments in the state employee pension fund.

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ESG is an investment strategy used to calculate the risk of long-term investments. For instance, fund managers could consider whether climate change will affect a business’ profits in the future. Governance factors examine conflict of interest policies, executive compensation and other safeguards to protect against corporate scandals. Social factors take into account whether employees are paid equitably.

The move against it comes as Florida’s pension fund dropped from a high of almost $200 billion a year ago to $179 billion in June as the stock market fell, according to a monthly SBA report to the trustees.

Financial analysts said it could affect millions of retired state employees because ESG issues do impact investment returns.

“It is pension money that runs the most significant financial risk if they don’t take ESG into account,” Sasja Beslik, chief investment officer at NextGen ESG, told Bloomberg News. “ESG — when done for real — is first and foremost a risk-management tool. Politicians run for four years, maybe eight. But pension money is very long-term.”

Deborah Jepson, who retired from teaching debate and journalism at Oviedo High in 2016, doesn’t understand why a policy change is needed.

“The fund has been well managed up until now. The last thing I want is for my pension to be politicized,” Jepson said. “Can the fund cover the pensions that are in there now and the ones that are coming up?”

The proposed changes seem arbitrary, she said. Current SBA investment policy for the state pension plan only requires its investment managers to ensure returns on investment cover the timely payment of promised benefits to current and future participants.

Jepson also likened the ESG ban to the governor and Legislature banning critical race theory in schools. “It doesn’t exist. He invented a problem, talked about it with the media, then passed laws,” she said. “It’s an imaginary problem.”

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It also goes against what most employees want, according to a Harris poll conducted last year for investment manager Nuveen, which found two-thirds of the respondents want their companies offering retirement plans that include ESG principles.

DeSantis claimed that many ESG funds don’t perform as well as traditional ones.

But a recent Bloomberg News report cited a Morningstar Inc. study that said over the past five years U.S. sustainability funds with a capitalization of $10 billion or more that focused on growth averaged an annual return of 14% while conventional non-ESG funds grew 11% a year.

DeSantis’ resolution directs the State Board of Administration to update the board’s investment policy based on financial factors that affect the rate of return — not social, political or ideological issues. DeSantis said he envisions Florida and other red states uniting and voting as one to act as a “counterweight” to ESG policies.

Critics said it’s a distraction from more pressing issues and political theater in DeSantis’ efforts to drum up his base for his reelection in November and with an eye on a possible run for president in 2024.

“It’s another culture war issue,” Adam Hattersley, a Democrat running for chief financial officer. “They are distracting from the disaster of property insurance in Florida that is costing everyone money. That’s the problem they should be focusing on.”

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Critics said the battle against CRT, which argues that racism is systemic in American society, was another manufactured problem. CRT isn’t a part of Florida’s K-12 public school curriculum and is mostly taught in graduate and law schools.

But the resolution itself doesn’t explain how the rule would be applied, or how funds would be analyzed to determine whether they are in compliance.

Nor does it specify whether something like climate change has a legitimate impact on the bottom line. It also doesn’t offer any instructions on whether to divest from existing investments that follow ESG principles or how it would differ from existing investment policy.

“The governor’s assertion is common sense,” Bryan Griffin, the governor’s press secretary, said in an email. “If investment decisions are being made using any factors other than the fiduciary and pecuniary interest of the beneficiary, then the best financial decisions aren’t being made.”

The rule will apply to all future investment decisions, he added, after the rule is approved and the SBA completes a review of governance policies and files its report to the Board of Trustees, no later than Dec. 15, 2023.

A lot hinges on how this policy directive is ultimately carried out, said Josh Lichtenstein, a partner at the law firm Ropes & Gray who has been tracking the ESG issue.

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ESG factors can be used to help determine whether a company is a sound long-term investment, he said.

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For instance, some studies have shown more diverse corporate boards are less prone to scandals, corruption and bribery, all of which can hurt a company’s stock price.

Climate change and sea-level rise could make beachfront property worth less in the future. The state has approved a $1.5 billion program to protect coastal communities against flooding.

And the Legislature and governor also approved a $100 million program for homeowners to harden their homes against the ever-growing threat of hurricanes.

“The chilling effect is exactly what the concern is,” Lichtenstein said. “The worry is you end up with fiduciaries who are afraid to consider the full range of what they believe is prudent to consider.”

Jonathan Webber, political and legislative director for Florida Conservation Voters environmental group, said it was inappropriate to exclude a huge sector of the business community from the investment fund because they embrace ESG.

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“It ties the hands of financial investors when they’re trying to do what’s right for their constituents,” Webber said. “The governor talks about freedom but prevents the freedom of corporations to do what their employees and consumers want.”

It also doesn’t square with the state’s own environmental policies or desires of Floridians, Webber added. “Everyone knows we all share a role in protecting that. It really doesn’t make sense.”

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