88th LegislatureCivil SocietyStatewide NewsTaxes & SpendingTexas Senator Files ESG Crackdown Bill Prohibiting ‘Social, Political, or Ideological’ Investing

In what is likely to be the Texas Legislature’s main follow-up to the brooding Environmental, Social, and Governance (ESG) investment fight, a bill has been filed to prohibit politically-driven investing by the state’s pensions or their agents.

Sen. Bryan Hughes (R-Mineola), who’s been the tip of Republicans’ rhetorical spear in the Legislature on the issue, filed Senate Bill (SB) 1446 this week.

SB 1446 would prohibit state pensions or any agent working on their behalf from considering “social, political, or ideological” factors in their fiduciary decision-making; rather, only “financial factors” may be considered, defined as decisions that would have a “material effect” on the portfolio’s return on investment.

A pension or agent is considered to have violated this prohibition if it’s “reasonably determined” to have made a financial decision based on those political factors, which includes public or private statements or joining a coalition that makes political statements.

An example of this is the Net Zero Coalition, a pledge joined by governments and businesses across the globe to reach “net-zero” carbon emissions by 2050.

Under the proposal, a state pension may not contract with a proxy or portfolio manager unless that agent provides a written commitment that it will follow these guidelines — a reverse twist on what some financial institutions have required of those seeking loans, such as Credit Suisse, which allegedly withheld financing to West Texas oilman Bud Brigham unless he publicly supported a net-zero transition.

The ESG movement has led to many financial institutions funneling capital toward politically progressive policies and projects — such as moving away from fossil fuel reliance, pushback against abortion restrictions and support for gun regulations, and the inclusion of “stakeholders” in a business’s decision-making.

Described as “stakeholder capitalism,” the effort intends to involve anyone who might be affected by a business’s actions in its process, not just “shareholders” or those who have a financial stake in the corporation.

Hughes’ bill would also revamp the transparency of proxy voting — the method by which financial managers vote on behalf of their clients on corporate governing proposals — specifically, that advanced notice is provided to the public.

It states that a pension must provide that notice at least seven days before a proxy vote is to be cast or two days after a vote recommendation is provided by the entity’s advisor.

This section is a response to incidents last year in which state pensions voted in favor of a proposal to withhold financing from fossil fuel companies and another to facilitate out-of-state transportation for abortions. Both pensions said the errant votes occurred due to their proxy advisor, Institutional Shareholder Services, and that those procedures have since been fixed.

Proxy vote search tools are already available at some of the pensions — the Teachers Retirement System publishes each on a searchable database, and has available the forthcoming 2023 votes — but this would require all to post future votes rather than those that have already happened.

Some of this priority shift has already occurred in the state pensions. For example, in a September 2022 update on its investment policy, the Employees Retirement System states, “ERS’ voting of social and environmental proposals will be based solely on enhancing or protecting long-term value to ERS and not on establishing or endorsing social policy. As part of its fiduciary duty, ERS shall consider only those factors that relate to the economic value of ERS’ investment and shall not subordinate the interests of ERS’ Trust Beneficiaries to unrelated objectives.”

SB 1446 also directs these pensions to compile and report all proxy votes to the State Pension Review Board, each of which will then be made publicly available by the agency. The bill’s enforcement empowers the state attorney general to investigate alleged violations of the law and allows for the suspension of pension officials found to have violated the prohibitions.

When analyzing potential offenses, Hughes’ bill strikes all references to a provision that requires the full portfolio of assets be judged instead of individual investments.

Last session, the Legislature passed a law that prohibits pensions from investing in companies deemed to be “divesting or sanctioning” fossil fuel companies; the first iteration of that list was published last year, causing state investments to be pulled from 10 companies, including BlackRock, the world’s largest asset manager.

This bill is meant as a follow-up to that bill. While it may be the feature, it’s unlikely to be the only one pushed to counter ESG in the financial world. Hughes has filed another bill, SB 1060, that’d prohibit any insurer operating in Texas from implementing a “political shareholder proposal,” defined as any item that restricts business dealings with fossil fuel companies or is otherwise ESG-oriented.

Most of the debate on ESG and investments centers on the term “fiduciary responsibility” — the Hippocratic Oath of the financial world — and the canyon-sized difference of opinion on what that requirement entails.

Republicans in the Texas Legislature appear hellbent on enacting a second wave of reforms despite the difficulty of swimming against the current of the global financial world. But with Vanguard’s recent move to withdraw from the Net Zero Asset Managers Initiative, Republicans see ground being gained in the financial trench warfare.