Iowans have an opportunity to make asset managers decide whether they will operate to further the financial interests of Iowa residents or weaponize their duties to further a political agenda.
Proposed state legislation known as Senate File 507 would protect free enterprise and Iowa’s taxpayers by codifying two commonsense principles: Taxpayer dollars—specifically public pension funds—should be invested based on pecuniary (i.e., financial) considerations, rather than in pursuit of the political or social ideology of the fund manager. State and local governments should refrain from using taxpayer resources to patronize such misguided financial firms.
Legislatures in 18 states—including Texas, Utah, Florida, and Ohio—already have passed legislation similar to the Iowa proposal to protect taxpayers from investment managers who place politics and ideology above their duties to the people.
Meanwhile, 14 other states—including California, Illinois, and New York—are explicitly directing public money to advance so-called environmental, social, and governance principles, called ESG. As residents and capital continue to exit states that embrace woke policies—in taxation, investment, and education—those 14 states are hardly ones to emulate.
On a practical level, boycotting businesses disfavored by the far Left and investing according to ESG values may indeed prove highly profitable for an asset manager deriving millions of dollars in management fees.
Indeed, some investors value advancing their own social or political agenda over maximizing investment returns. In a free society, such a choice should be permitted—despite the possibility of suboptimal investment returns.
However, those who manage and invest taxpayer dollars (including public pension plan managers) should not be placing woke ideological pursuits ahead of their fiduciary duties.
Opponents of this practical reform continue to spread much misinformation about the specifics. So, let’s dispel some myths.
First, not all boycotts are targeted. The permissibility hinges on whether the fund manager has a “reasonable business purpose” for boycotting a business or sector for investment—purposes such as mitigating risk, complying with the law, or promoting financial success.
Not all timber, mining, agricultural, firearms, or fossil fuel companies are equally prudent investments. Nor do all sectors fit all risk profiles. Importantly, the Iowa legislation would prohibit the state from contracting with firms that boycott companies in these sectors for nonpecuniary reasons, such as violating a net-zero carbon policy.
Opponents of the legislation suggest a company that is merely “accused” of participating in these destructive boycotts would be banned from doing business with Iowa and that the standards for being included on the list of these companies are “ill-defined.” These notions are false.
Perhaps they should acquaint themselves with the legislation.
A mere “accusation” would not be sufficient to sever ties with a company. Even prior to being placed on a list of companies engaged in boycotts or nonpecuniary investment methods, the bill stipulates that the fund “shall consider and rely” upon a statutorily defined body of information, including from company statements, research firms, and government agencies.
Under the bill, if a company is indeed participating in these boycotts or investment methods, notice would be provided to the company that such activity may preclude business opportunities with the state. The company would have a chance to cease such prohibited behavior.
Not an Undue Burden
In fact, the Iowa legislation would allow state and local governments to wait a full 18 months after notice is given to cease entering new contracts with these companies.
This detailed process for identifying problematic companies, the lengthy notice period, the ample time allowed for a business to alter such destructive practices, and the flexibility in terminating existing contracts would ensure minimal disruption to government services.
Opponents of the Iowa bill claim this would be an undue burden on local governments. Far from it.
First, plenty of service providers—financial or otherwise—are not engaged in ESG pursuits. Other states that already have embraced these taxpayer protections are discovering this.
Opponents rely on a Wharton study that predicted higher interest rate costs for municipal debt issuance in Texas, following the enactment of similar legislation there. However, this prediction wasn’t due to higher risk, but a prediction that all five of the largest municipal underwriters would leave the Texas market.
As it turns out, Fidelity Investments confirmed that it would comply with the new law. Furthermore, other banks also will step in to offer underwriting.
That’s another benefit of this proposal: Some investment firms will back away from the ESG crusade. Other investment firms will step in to provide these services.
Secondly, in the rare instance where alternatives are not available, the bill would allow ample leeway for exceptions to the general rule. It also clearly provides that “premature or otherwise imprudent termination of a contract” is not required.
To be clear, asset managers engaged in ESG-style investing place their customers at risk.
Consider the Social Impact Report of Signature Bank ($SBNY)—a top bank that now is nearly insolvent after explicitly boasting that it “seeks out and engages in socially and environmentally conscious lending activities.” Signature Bank also bragged:
Bankwide credit policy … details the types of credit deemed to have [a] substantial negative influence on society, and the Bank seeks to avoid granting any loans that could potentially have harmful effects. As a result, we do not engage in lending to projects or companies related to the production of fossil fuels; to the firearms, armaments, and military products industries; [and] to private penitentiaries.
This outlook serves as a stark reminder of the necessity for Iowa legislators to affirm that those who manage taxpayer resources place the needs of the taxpayers first.
Ideologically driven, woke boycotts and divestment breaches the fiduciary duty of asset managers to the people of Iowa, and betrays the trust of taxpayers. These malinvestments harm beneficiaries by diminishing retirement security and ultimately harm taxpayers either with higher taxes or diminished government services from the lower returns.
ESG-oriented investment schemes negatively affect the nation by cutting off capital to some of the most profitable and necessary sectors of the economy.
With Communist China as a rising threat, state legislators have a national role to play by pushing back against the boycotts of investments in fossil fuel, mining, and agricultural companies that place us in greater dependence on the Chinese as a primary supplier of basic needs.
Iowa’s Senate File 507 would prevent hedge funds, mutual funds, private equity funds, or banks from swapping their fiduciary duty to Iowans with their own woke social, political, or environmental agendas.
This piece originally appeared in The Daily Signal