A little-known piece of legislation surfaced earlier this year that would have banned Indiana government and its pension funds from working with investment firms that boycott coal and gas companies.

Ultimately, the bill didn’t have enough support to clear the Indiana General Assembly. But conservative Republican blowback continues to grow against a concept known as ESG investing, which takes environmental, social and corporate governance concerns into consideration when assessing the value of companies. ESG investing often eschews companies believed to contribute to climate change or human-rights violations.

Proponents of ESG investing argue that investment firms are merely responding to market forces and customers’ desires for “socially-responsible” investment options. The firms often offer some “green” funds that favor solar and wind companies over fossil-fuel providers, for example.

But critics say banks and investment firms such as New York City-based BlackRock Inc., the world’s largest asset manager (which has $10 trillion under management), are using activist investing to control board seats of major companies and push their political agenda instead of prioritizing their clients’ financial interests.

“You have three entities [BlackRock among them] that control $20 trillion—more than the whole budget of the United States—walking into your boardroom and saying, ‘Here is our political agenda. You either carry it out, or we’re going to take board seats,’” said Rep. Ed Soliday, a Republican from Valparaiso who co-sponsored a bill in the 2022 session that pushes back against investment firms that are actively divesting from fossil fuel companies.

House Bill 1224, modeled after a Texas law, would have prohibited state government and the Indiana Public Retirement System from working with investment firms that boycott fossil fuel companies.

Despite clearing the finance committee by a 7-5 vote—both Republicans and Democrats voted against it—the bill was never brought to the House floor. But it could emerge again in the 2023 session.

“We’re looking at what some other states are doing,” said Rep. Ethan Manning, a Republican from Miami County who authored the 2022 bill.

Manning said firms pulling money out of fossil fuels amounts to “setting energy policy for the state,” which should be the duty of lawmakers.

“These investment firms are taking away options that we need for a reliable and affordable grid,” he added.

Still, it’s not clear exactly what “boycotting” fossil fuels means in the context of investment firms. BlackRock executives might advocate for wind and solar energy, The Washington Post recently reported. But in Texas, it still invests more than $100 billion in Texas energy companies on behalf of its clients.

Indiana Attorney General Todd Rokita added some momentum to opposition to ESG investing when he issued an advisory opinion this summer. It argued that state law prohibits INPRS, which uses investment firms that engage in ESG investing, from choosing investment strategies based on ESG considerations.

“We must root out investment-management companies that scheme to leverage Hoosiers’ retirement funds to advance leftist social and economic agendas that otherwise cannot be implemented through the ballot box,” Rokita said.

An INPRS spokesperson declined to say whether the law would hinder its ability to ensure financial returns for its members.

“If a bill were introduced changing the law, INPRS would evaluate the fiscal impact of that bill at the time it is introduced and provide this information to the Legislative Services Agency pursuant to the established legislative process,” INPRS spokesperson Dimitri Kyser told IBJ.

Kyser said the INPRS board recently passed a governance risk policy that will be incorporated into the agency’s Investment Policy Statement, affirming its commitment to “invest its assets in the best interests of INPRS’ members and beneficiaries.”

‘A devastating blow’

Lobbyists for the fossil fuel industry also are pushing back against ESG investing.

During a recent meeting of the 21st Century Energy Policy Task Force, a legislative summer study committee tasked with making energy policy recommendations, Matt Bell, CEO of Reliable Energy Inc. (formerly known as the Indiana Coal Council), said ESG investing is “starving cost-effective fossil fuel energy and capital by pressuring companies to divest” from coal and gas.

“We encourage Indiana to join the growing force of states who are recognizing that ESG discrimination delivers a devastating blow to fossil fuel companies seeking to meet the demand for affordable and reliable energy, and it does so at the expense of the state’s pension,” Bell said.

Rep. Matt Pierce, a Democrat from Bloomington who also serves on the task force, said divesting from major banks creates confusion and uncertainty in the financial marketplace, which is why banking lobbyists in Indiana spoke out against HB 1224 last year.

He said he also understands why the fossil fuel industry supports the legislation.

“The coal and the fossil fuel industry really wants this protection. They can see the market is moving away from them,” Pierce told IBJ. “They’ve got a motivation to try to limit anything that’s going to reduce their access to capital.”

Sen. Shelli Yoder, also a Democrat from Bloomington and a member of the energy task force, introduced a bill last year that would have done just the opposite: Require the board of trustees of INPRS to divest from the top 200 largest fossil fuel companies.

“We have to think about the security threats that the climate crisis is going to continue to have on Hoosiers. It’s beyond smart investment,” Yoder said.

Growing movement

In recent years, several Republican-controlled states have sought to penalize banks and investment firms that have made public commitments to shift away from fossil fuel companies.

In May 2021, 15 state treasurers signed a letter expressing concerns that members of the Biden administration were reportedly pressuring U.S. banks and financial institutions to refuse to lend to or invest in coal, oil and natural gas companies. Indiana Treasurer Kelly Mitchell did not sign the letter.

“As a collective, we strongly oppose command-and-control economic policies that attempt to bend the free market to the political will of government officials,” the letter read. “It is simply antithetical to our nation’s position as a democracy and a capitalist economy for the Executive Branch to bully corporations into curtailing legal activities.”

That August, Texas passed a law banning some financial firms from doing business with the state. State Comptroller Glenn Hegar prohibited BlackRock, as well as some investment funds within large banks such as Goldman Sachs and JPMorgan Chase, from entering into most contracts with state and local governments because they avoid the fossil fuel sector.

Earlier this year, West Virginia followed suit with similar legislation, and Arkansas recently stopped using BlackRock for certain services due to its stance on climate change.

Last month, 18 state attorneys general joined Missouri’s investigation into ESG investing ratings company Morningstar Inc. and its subsidiary Sustanalytics for alleged consumer fraud or unfair trade practices. Rokita was among the signatories.

‘Fundamentally flawed’

Some say it’s easy to see why Indiana—the eighth-largest coal-producing state—could be next in line to take a public stance against so-called green investing.

“I would certainly expect a piece of legislation this year,” said Kerwin Olson, executive director of Citizens Action Coalition, an Indiana consumer and environmental advocacy organization. “We know that the fossil fuel industries are lobbying hard on this idea and this piece of legislation that we see in other places across the country.”

Idaho, Oklahoma and Florida have also created policies that restrict whom they will do business with, which some Democrats argue will result in financial costs to taxpayers.

Earlier this month, 14 state treasurers from mostly Democratic-controlled states crafted a missive of their own in response to the anti-ESG movement. Mitchell also did not sign this letter.

“The blacklisting states apparently believe, despite ample evidence and scientific consensus to the contrary, that poor working conditions, unfair compensation, discrimination and harassment, and even poor governance practices do not represent material threats to the companies in which they invest,” the letter reads. “They refuse to acknowledge, in the face of sweltering heat, floods, tornadoes, snowstorms and other extreme weather, that climate change is real and is a true business threat to all of us.”

When asked for her views on legislation banning the use of ESG-focused investment firms, Mitchell urged a thoughtful review.

“The Treasurer’s Office performs duties enjoined to it by state law,” Mitchell said in a written statement to IBJ. “Any legislative directive that narrows free market options impacts investment of Hoosier funds, and the potential ramifications of such actions should be thoughtfully considered.”

Banks and investment firms are increasingly offering ESG funds to their customers; in 2021, ESG funds in the United States attracted nearly $70 billion in new assets, up from $51.1 billion in 2020 and $5.4 billion in 2018, according to Morningstar Direct, an investment analysis firm.

Dax Denton, chief policy officer for the Indiana Bankers Association, said restricting investments or state commerce based on objections to ESG approaches is a “fundamentally flawed” approach.

“These types of bills attempt to prioritize specific industries for access to capital, an approach that runs counter to the free-market structure and the very foundation of our nation’s banking system,” Denton said. “This free-market approach has given our nation the strongest and most resilient financial system in the world.”

There is some evidence to suggest that these restrictive policies are yielding negative returns for taxpayers.

After Texas passed its law, five of the largest underwriters for municipal bonds left the market, which resulted in less competition and higher borrowing costs, according to a study by the ESG Initiative at the Wharton School of the University of Pennsylvania.

Researchers estimated that Texas cities will pay an additional $303 million to $532 million in interest on $32 billion in bonds as a result of the new law.

SEC floats new rule

While the legislative debate roars on, regulatory review of ESG practices is also picking up steam.

The U.S. Securities and Exchange Commission is pursuing new rules that would, for the first time, require funds and advisers to disclose financial data that show how ESG issues actually factor into their investment products and services.

It’s a sort of a truth-in-advertising approach that, for example, would require an investment fund focused on protecting the climate to show how it chooses “green” companies to invest in.

The SEC is also asking ESG-focused funds and firms to disclose more details about their ESG strategies in their fund prospectus and annual reports.

While firms like BlackRock have already been engaged in such practices, the rule would help ensure that investment funds aren’t “greenwashing,” or presenting themselves as more environmentally focused than they actually are.

The Indiana Banking Association has expressed concerns that details from newly required disclosures could be used to implement “unrelated policy preferences” that would restrict banks’ business practices.

The lobbyist group signed onto a letter sent by the American Banking Association to federal financial regulating agencies that said banks should be “free to lend to, invest in and generally do business with any entity or activity that is legal, without government interference.”

The SEC is expected to finalize and adopt the rule before the end of the year
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