As conservatives push to combat 'woke' investing by KPERS, Kansas joins national trend

Lawmakers across the country are increasingly focused on where and how public money is being invested, with Kansas set to join in the national debate over what some have called "woke" investments that take into account nonfinancial factors.

Kansas, like many states, uses large investment firms to help manage its public employee pension fund. But those entities have increasingly come under fire for their investment policies, angering conservatives who believe they are undercutting the oil and natural gas industries.

Those money managers can employ an investment strategy that takes into account environmental, social and governance (ESG) factors when making decisions, with concerns about particular industries changing the calculus of where to put their money.

Attorney General Kris Kobach said the fight over ESG was his top policy priority heading into the 2023 legislative session.

"To some people, those are lofty goals, and to those people, I would say you should advance those goals in the legislatures of this country and in the Congress," he said at a news conference last week. "That is the place to debate whether or not America should use less fossil fuels. But it is not something that you should use the hard-earned dollars of Kansas workers or the dollars of Kansas taxpayers to advance those objectives."

But Kobach's favored policies — also supported by some legislative Republicans — would go further than those implemented in other states.

Most other places have targeted only investments in the public sector. But the Kansas bill would also require private money managers to notify and get consent from customers before investing their funds with a firm that embraces ESG.

"I see this as the latest manufactured, three-letter crisis that the social conservatives have concocted to fight their culture war," said Rep. Rui Xu, D-Westwood, the top Democrat on the House Financial Institutions and Pensions Committee. "I do not see this as an issue."

KPERS takes center stage in debate over ESG, BlackRock

Much of the attention nationally on the ESG issue has been focused on where pension funds, like the Kansas Public Employees Retirement System, puts their money.

KPERS, under state law, is barred from making investments "if the sole or primary investment objective is for economic development or social purposes or objectives" and is restricted to whatever investments can bring in the best return on investment.

"We review their investment progress," said Alan Conroy, executive director of KPERS, in an October interview. "What they've been doing based on what's in the best interests of the member."

But the state does make use of some of the investment firms that have garnered the fiercest criticism over ESG nationally.

Most notably, that includes New York-based BlackRock, which controls 19% of the KPERS portfolio, though the ESG concern applies to the 11% of the fund that is passively managed by BlackRock.

But BlackRock and other firms can also vote on behalf of its clients in board or company elections, a way of shaping policies in those organizations even though the shares may actually be held by a state pension fund.

This practice, dubbed proxy voting, has raised the alarm for conservatives that Kansas' votes are being used to advance certain policies in the boardroom.

Treasurer Steven Johnson decried ESG and proxy voting trends during his campaign but was more measured in his comments, noting that if an industry or investment is the most financially prudent for the state then it will rise to the top without any need for ESG.

Shortly after taking office, however, Johnson joined State Financial Officers Foundation, a Shawnee-based nonprofit organization that has pushed its members, Republican statewide officials across the country, to target ESG and promote the oil and gas industry.

It is unclear if Johnson supports proposals circulating in the Legislature regarding ESG. A spokesperson didn't immediately return questions seeking comment on the matter.

Kansas legislation focuses on public, private sector on ESG

Legislation backed by Sen. Mike Thompson, R-Shawnee, and Rep. Michael Murphy, R-Sylvia, would require the state divest from entities that apply ESG factors to their investment decisions.

This is consistent with a number of conservative state legislatures who have taken aim at ESG in recent months. In the last year, 17 states have introduced bills that take aim at firms that either ESG or which are deemed to boycott specific industries, notably the oil and gas sector.

Texas has been the most notable example of this legislation playing out, where state government is barred from patronizing any companies that shun fossil fuel industries. That statute, however, has been criticized for having a chilling effect on investments while also being inconsistently enforced.

A similar debate is set to play out in Topeka.

Potential bills could deal with proxy voting or bar investment in firms that boycott particular industries, such as firearms manufacturers or oil and gas companies.

But the bill from Thompson and Murphy also would look in a direction not yet seen in other states: the private sector.

The legislation would require private money managers inform their clients if they are looking to invest their funds with a firm that uses ESG principles and gain their consent before moving forward.

Similar requirements would not apply to other firms that use nonfinancial considerations, such as those based on religion, in making investment decisions.

Thompson said the proposal would be "one of the first in the country" to make such a move.

"If they want to go in that direction, fine, but they also have to understand what the risks might be," he said. "And so it's mostly just saying, 'OK, it's caveat emptor and buyer beware."

Any forays into the private sector have garnered concerns from financial institutions based in Kansas, who are worried about a potential impact on their members.

Alex Orel, a lobbyist for the Kansas Bankers Association, expressed frustration with federal regulations that he said dictate who banks can and cannot lend to.

President Joe Biden, for instance, relaxed a Trump-era rule that would allow private investment managers and companies to consider the effects of climate change and other issues when selecting 401(k) plan investments.

A separate regulation would allow retirement plans to consider nonfinancial factors in administering trust assets, a move that prompted a legal challenge from 24 attorneys general, including Kobach.

But Orel also worried about a conflict between any federal requirements and state law, with banks and financial institutions potentially risking their backing from the Federal Deposit Insurance Corporation and other regulatory necessities.

Passing policies just to make headlines, he cautioned lawmakers, would be unwise.

"I’m not in the business of advocating for bills that get vetoed," he said. "There are those who want to take things a step further and I am against that."

How could ESG legislation impact the free market?

Xu noted the bill could "lead down a lot of weird paths they might not intend" and bring legal complications by regulating the actions of private businesses.

"And actually, if you're a small government conservative, I think it is actually antithetical to your political philosophy for the government to get involved in this," he said.

Indeed, the prospect of wading into the ESG issue has made some self-professed free market lawmakers nervous. Some have worried that precluding investing in funds or products that are deemed to use ESG could actually steer investors away from a move that might be the most financially prudent.

Conservatives argue ESG funds underperform other investments and there is evidence that was the case in 2022, though longer-term returns fared better and have beaten their benchmarks.

"On one hand we have an obligation to protect our constituents and those who are investing in Kansas government funds," said Rep. Carl Maughan, R-Colwich. "But, on the other hand, people have a right to do with their money as they will."

Orel argued he found ESG concerning on a person level but also didn't want to open the door for a bank to be sued for not lending to an individual for other reasons, like if a small-town institution didn't have the needed capital or a person's credit-worthiness was subpar.

"The intention of some of the legislation we’ve seen nationally and in Kansas is well intended, they’re trying to protect core sectors of our economy, core businesses," he said. "I respect that as a Kansan. But the problem is with some of the policies we’ve seen are very punitive, are very broad and create unnecessary liabilities for Kansas banks or businesses."

But Murphy said the state needs to push back on "overbearing" actions from powerful firms that are generally based thousands of miles away from Kansas.

He compared it to a parent who opts not to give his child money to go out with their friends.

"It's Dad controlling the money," Murphy said. "That's sort of what we have here."

This article originally appeared on Topeka Capital-Journal: Kansas lawmakers consider curbing woke ESG investments by KPERS