ESG battles heating up over South Carolina pension plan

By RICK BRUNDRETT

As S.C. lawmakers move closer to banning liberal ESG factors in state pension plan investments, the commission overseeing those funds is reducing at least one global management firm's control over shareholder votes that come with the billions of public retirement dollars flowing to companies.

But some conservatives are skeptical of the commission's latest actions.

Michael Hitchcock, the S.C. Retirement System Investment Commission's (RSIC) chief executive officer, recently told The Nerve that in "response to the criticism over ESG" (environmental, social and governance) policies, New York-based BlackRock Inc., which as of last fiscal year managed more than $10 billion in state pension investments, developed a "Voter's Choice Program" that will allow the commission to direct how its shareholder proxy votes will be cast "as if we owned the shares directly."

Critics contend that BlackRock, which has been ranked as the world's largest asset manager with about $8.6 trillion in assets under management at the end of 2022, and other major firms that manage state pension investments nationwide, have used their shareholder voting power to push corporations to adopt ESG-related policies, such as dramatically cutting carbon emissions by certain target dates, or implementing workplace "diversity, equity and inclusion" programs.

Hitchcock in his written response last month to The Nerve said the RSIC hired, effective Jan. 20 of this year, Glass Lewis, a San Francisco-based proxy advisory service, to cast shareholder votes on behalf of the RSIC, based on the "Voter's Choice Program" and according to "guidelines that we agreed upon."

Asked directly, though, whether those guidelines would completely ban Glass Lewis from considering ESG factors in proxy voting on behalf of the RSIC, Hitchcock replied, "In my view, yes or no does not fully answer your question."

Hitchcock contended that providing "clear objective guidelines" is a "more effective means of ensuring that our proxies will be voted in a manner consistent with the standard to maximize the value of the investment for all proxy votes, including voting against proxy questions that a reasonable person would interpret as promoting ESG principles that are unrelated or harmful to the profitability of a particular company."

Contacted recently by The Nerve, Scott Shepard, director of the Free Enterprise Project at the National Center for Public Policy Research in Washington, D.C., described Glass Lewis as "more left-wing" than BlackRock, adding that Glass Lewis opposes all "right-of-center" shareholder proposals.

"Handing things over to Glass Lewis is just like jumping out of the frying pan into the fire," Shepard contended.

Meanwhile, the S.C. House last week overwhelmingly approved a bill, titled the "ESG Pension Protection Act," that would require any "commission engagement with a company regarding the exercise of shareholder proxy votes" be for the "sole purpose of maximizing shareholder value" and based "solely on pecuniary factors," which would exclude the "promotion, furtherance, or achievement of environmental, social, or political goals, objectives, or outcomes."

The bill (H. 3690), the main sponsor of which is Rep. Bill Taylor, R-Aiken, and which has 53 co-sponsors, would allow the commission to hire a proxy advisory service such as Glass Lewis, but only if the hired firm has "a practice and commits in writing to follow proxy guidelines" that are "consistent with the requirements" of the bill.

Yet according to an analysis of the bill by the S.C. Revenue and Fiscal Affairs Office, the RSIC "noted that whether an external investment manager would vote proxy consistent with the requirements of this bill is currently unknown."

"While I believe that the RSIC has responsibly managed the trust, we want to statutorily guarantee they will continue to do so," House Speaker Murrell Smith, R-Sumter, who is a bill co-sponsor, said in a prepared statement last month to The Nerve while the bill was still in a House committee. "Our goal is to ensure that the RSIC is prioritizing shareholder value and maximizing returns over supporting political causes and engaging in activism investing."

The bill was referred to the Senate Finance Committee, chaired by Sen. Harvey Peeler, R-Cherokee. This year's regular legislative session is set to end next month.

An investigation by The Nerve found that BlackRock, which managed four public-stock indexes in the state pension plan that as of last June 30 totaled more than $10.5 billion in market value, and Boston-based State Street Corp., another pro-ESG investment firm that managed a total of more than $4 billion in a separate index, were among the five-largest collective shareholders at the end of 2022 in the plan's four biggest indexes.

Hitchcock in his written response last month said the RSIC is "close to agreeing to a similar approach to proxy voting" with State Street as the "one we are implementing with BlackRock."

As a group, BlackRock, State Street and about 50 other investors held shares with a total market value of more than $2.6 trillion as of Dec. 30 among the 19 biggest companies, by publicly traded stock, that were included in one or more of the four largest indexes, The Nerve's review found.

Most of those companies, which include well-known names such as Amazon, Apple, Google and Microsoft, have adopted specifically identified ESG or other liberal policies or goals, company records show.

The Nerve over the past year has extensively reported about ESG issues in South Carolina, including proposed legislation related to the state pension plan. The South Carolina Policy Council – The Nerve's parent organization – last month issued a number of recommendations to deal with the ESG movement in the Palmetto State, including requiring "stronger protections in place for proxy voting, so that ESG-minded investment managers aren't free to advance their agenda using the public's money."

At the federal level, President Joe Biden last month used his first veto of his presidency to reject a Republican-led resolution that would have prevented investment managers from basing decisions in private retirement plans on ESG factors. The U.S. House later failed to override the veto.

The Nerve last year reported about the Biden administration's proposed rule to allow managers of private retirement plans to promote ESG factors in those plans, and on other federal ESG issues.

'All about corporate votes'

Generally, employer and employee contributions in the state pension plan that are overseen by the S.C. Public Employee Benefit Authority (PEBA), along with investment portfolio earnings managed by the RSIC, are the main revenue sources that fund benefit payments to retirees or their beneficiaries.

Under state law, the RSIC has seven voting members, two of whom are appointed by the governor, with the state treasurer, comptroller general, and the chairmen of the Senate Finance and House Ways and Means committees each making an appointment. The other voting member is an eligible state retiree unanimously appointed by the other six commissioners.

To be eligible to serve, commissioners must meet at least one of nine qualifications, such as having at least 12 years of professional experience in the financial management of pension or insurance plans, or as a certified public accountant with financial management, pension or insurance audit expertise, under state law.

The current commission chairman is Bill Hancock, who was elected as chairman by fellow commissioners and, according to Secretary of State records, was appointed to his seat by S.C. Treasurer Curtis Loftis in 2017.

Commissioners by law serve four-year terms and receive an annual salary of $20,000.

In an annual fiscal 2022 report, PEBA listed the total number of retirees and beneficiaries at 173,786 in the state's five separate retirement systems covering general employees, first responders, state lawmakers, judges and solicitors, and the S.C. National Guard. The average annual benefit in the two largest systems covering general employees and first responders was $21,147 and $21,688, respectively, according to the report.

ESG critics contend that when dealing with public pension plans, BlackRock and other liberal investment- management companies hired by government agencies could substitute ESG factors – such as reducing the effects of climate change, increasing diversity on corporate governing boards, or supporting social justice causes – for traditional financial considerations. That can result in investments having lower rates of return and plans being underfunded, they say.

There is no single-accepted, national definition of ESG, though the movement has been growing nationally in recent years.

In a written response last month to The Nerve, Hitchcock said the RSIC doesn't use ESG as a "consideration in making investment decisions," describing it as an "ill-defined amalgamation of factors that shift depending on the perspective of a particular individual and the consideration of which have little to no benefit in enhancing return because of their non-pecuniary nature."

But major investment firms hired to manage public pension plans often use their shareholder proxy-voting power to pressure companies to adopt ESG or other liberal agendas, according to critics.

"ESG is all about corporate votes," Loftis said in an interview last month with The Nerve. "Conservatives across this country in red states sent their money to state pension plans, and most of the time, that money was converted into left-wing votes, which has allowed Wall Street and Main Street to go from conservative to radical left-wing in 10 years or less."

Keith Brainard, a spokesman for the National Association of State Retirement Administrators, told The Nerve last year that BlackRock, as the world's largest asset manager, is "likely under contract with a large number of public pension funds and public pension plan sponsors (states and cities)," noting there are about 5,000 public retirement systems in the U.S.

Loftis said he's concerned that although the RSIC can "get the votes (BlackRock's shareholder proxy votes) back," it won't "do anything with them." Loftis in October made national headlines when he announced he was divesting the final $200 million of BlackRock holdings from a $5 billion portfolio managed by his office.

Other states that have pulled some or all of their BlackRock-managed assets since last year include Arkansas, Florida, Louisiana, Missouri, Texas, Utah and West Virginia.

A proxy vote typically is a ballot cast by a person or firm on behalf of company shareholders who can't attend shareholder meetings or who don't want to vote on certain issues. Those ballots can cover a variety of topics, including executive compensation and benefits, the makeup of a company's board of directors, and mergers or acquisitions.

The total number of companies in each of the five public-stock "MSCI" (Morgan Stanley Capital International) indexes in the state pension plan ranged as of last month from 1,826 to 9,126, according to MSCI's website. An index generally is a way to measure the price performance of a group of securities over time.

Hitchcock in his written response last month said BlackRock casts proxy votes for shares owned by a "collective investment trust" on "behalf of the investors."

Hitchcock told The Nerve for a story last May that the state's public-stock portfolio is "all passively invested" and "spread across the world," describing the RSIC as "50-year investors." He said then that neither BlackRock nor State Street makes "any investment decisions for us whatsoever."

Generally, passive investing refers to a "buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market"; and unlike active trading, doesn't seek to "profit from short-term price fluctuations or market timing," according to Investopedia, a financial information website.

In its analysis of the ESG bill passed last week by the House, the state Revenue and Fiscal Affairs Office said the RSIC's management of proxy voting "in-house" would cost more than $1 million, including the hiring of five full-time investment officers at a salary and benefits totaling $245,000 for a senior officer and $161,000 for each of the other four workers.

Hitchcock's annual compensation is $361,633, according to the state salary database.

'Explicitly left-wing'

As of last June 30, the public-stock indexes managed by BlackRock and State Street totaled $14.6 billion in market value, which represented 38.3% of the overall $38.2 billion market value of all investments in the state pension plan, net of fees, according to an RSIC annual report.

For the last two fiscal years, BlackRock and State Street were the only investment management firms involved with the public equity portfolio in the state pension plan, RSIC records show. The total market value of that portfolio dropped by 16.28% as of last June 30 compared to the previous year, though it had an overall one-year increase of nearly 42% in fiscal 2021.

BlackRock's and State Street's management fees for fiscal 2022 totaled $3,036,438 and $711,525 respectively, according to information provided by Hitchcock to The Nerve. The cost to hire Glass Lewis to manage RSIC's proxy votes through BlackRock's "Voter's Choice Program" is $159,205, "which is being offset by a corresponding reduction in BlackRock's management fee," he said.

In his interview last month with The Nerve, Shepard, of the National Center for Public Policy Research, said Glass Lewis is "an explicitly left-wing organization," contending that the proxy advisory firm doesn't support shareholder proposals that protect the "civil rights of people they don't call diverse," and that it accepts the "UN (United Nations) line on decarbonization without any concern whether decarbonization according to a political schedule is going to be bad for a company."

In a recent written response to The Nerve, Glass Lewis spokesman Dimitri Zagoroff said while the firm is "unable to comment on any specific client's voting policy," it generally follows the "voting policy determined by that client." Client preferences can be "tailored adjustments to one of our wide variety of 'thematic' voting template options," including one template focusing on "climate and ESG issues," and another template that concentrates on "oversight and financial factors, ignoring environmental and social issues," he said.

Hitchcock in his written response said Glass Lewis is "currently the only proxy advisory service that has both the capability to manage the number of proxy votes we have exposure to and that also offers the ability to choose thematic voting guidelines that we agree with," noting that the indexes the RSIC invests in "comprise over 9,000 stocks that may each have multiple proxy vote questions during the year."

Hitchcock also said that according to the voting guidelines, Glass Lewis will "primarily follow company management's recommendation when deciding how to cast a particular proxy vote, unless management's recommendation runs counter to the best interest of the shareholders," adding that the RSIC will receive "regular reporting" from Glass Lewis to "ensure that they are voting in line with the guidelines."

Shepard, however, identified another proxy advisory firm that he contended could offer the same services without the RSIC having to "fight the left-wing bias" of Glass Lewis.

In a written response last month to The Nerve, BlackRock spokeswoman Amanda Friedman didn't answer specific questions about the firm's management of stock investments in the state pension plan. But she cited a passage from BlackRock Chairman and CEO Larry Fink's 2023 annual letter to investors contending that it's "not the role of an asset manager like BlackRock to engineer a particular outcome in the economy."

In his 2022 annual letter, however, Fink asked that businesses "demonstrate how they're going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies," contending that most shareholders, employees, customers, communities and regulators "now expect companies to play a role in decarbonizing the global economy."

BlackRock has about 16,000 employees in 38 countries, including more than 8,000 workers and 190,000 financial advisors in its U.S. offices, according to its website.

A State Street spokesman declined comment when contacted recently by The Nerve. The company has about 42,000 employees worldwide; its investment management arm is State Street Global Advisors, company records show.

In its annual 2021 ESG report, State Street said that as "one of the world's largest service providers and managers of institutional assets," it believes that "addressing environmental, social, and governance (ESG) issues can help generate better long-term outcomes for the world's investors and the people they serve."

Billion-dollar influencers

The Nerve's latest investigation found that the investment management firms below collectively were the top-five shareholders, as reported last Dec. 30, among the 19 biggest companies, by publicly traded stocks, that were included in one or more of the four-largest, public-stock MSCI indexes in the state pension plan as of March 10 and March 13 of this year. The Nerve's review was based on information listed on the MSCI and Yahoo Finance websites.

Investment Firm Total No. of Shares* Total Share Value*

Vanguard Group 4.3 billion $684.8 billion

BlackRock Inc. 3.5 billion $565 billion

State Street 2 billion $323.6 billion

FMR LLC 1.4 billion $235.2 billion

Geode Capital 943 million $148 billion

*The totals included shares in Google (Alphabet Inc.) that are designated with voting rights; another large class of Google stock doesn't come with voting rights and wasn't included in the review.

BlackRock last fiscal year managed a fifth public-stock MSCI index in the state pension plan, which focuses on emerging markets worldwide. As the smallest index among the five indexes, it was not part of The Nerve's analysis.

Overall, The Nerve's review found that the 53 top investors among the 19 largest companies that were included in one or more of the four biggest indexes were holders of nearly 17 billion total shares with a collective market value of more than $2.6 trillion as of Dec. 30.

Like BlackRock and State Street, the Vanguard Group, FMR (Fidelity Management & Research) LLC and Geode Capital (Management) also are proponents of ESG-related goals, policies or programs, company records show. Vanguard's corporate website, for example, says its company goal is to reach "carbon neutrality" in 2025 throughout its global operations involving 18,000 employees, noting, "We consider climate change to be a material risk to many companies and their shareholders' long-term financial success."

The Pennsylvania-headquartered company last year dropped out of the Net Zero Asset Managers, an international group of asset managers committed to the goal of net-zero greenhouse gas emissions by 2050 or earlier – a move ESG critics say was the result of pushback by conservative states.

Besides combating climate change, Vanguard also supports diversity, equity and inclusion (DEI) initiatives within its company, according to its annual 2022 DEI report.

Boston-based FMR supports "integrating ESG considerations across our products, services, and investment decisions," while Geode Capital Management, also headquartered in Boston, in its "Environmental, Social & Governance ('ESG') Mission Statement" said as a "signatory to the Principles for Responsible Investment (PRI)," it "promotes ESG principles in our stewardship of investments in the funds and accounts we manage, as well as in our own corporate activities," company records show.

The Nerve sent written questions to Vanguard, FMR and Geode Capital inquiring about their ESG-related policies and proxy voting. An FMR spokesperson acknowledged receiving The Nerve's questions but gave no further comment; the other two firms didn't respond.

'Abundance of cowardice'

In his interview with The Nerve, Loftis, the state treasurer, contended that BlackRock, Vanguard and other major investment-management firms "work against the interest of South Carolinians every day, and they do so because we gave them money, and they took that money and, with the (shareholder proxy) votes that came along with that money, voted against us."

"There's not a left-wing idea out there that they haven't put into the corporations," he said about the investment firms' voting power.

ESG critics say it's no coincidence that many large corporations that benefit from state pension investments have ESG goals, policies or programs, given the shareholder proxy-voting power held by pro-ESG firms hired to manage the investments. Following are some examples of ESG-related initiatives at several of the biggest companies included in public-stock indexes in South Carolina's pension plan:

*Apple's 2022 ESG Report – "Committed an additional $55M to our Racial Justice and Equity Initiative," including funding for "organizations driving criminal justice reform and environmental justice."

*Microsoft's 2021 Environmental Sustainability Report – "We granted $100 million to Breakthrough Energy Catalyst to accelerate the development of climate solutions the world needs to reach net-zero across four key areas … With net zero becoming the new normal … the world must move from climate pledges to climate progress."

*Amazon's 2021 Sustainability Report – "In 2021, we supported the U.S. federal government's actions to address climate change, including supporting emissions reducing investments in the Bipartisan Infrastructure Law and the climate provisions in the proposed Build Back Better legislation." The company also noted that it has "publicly stated our position on several key issues," including "recognition of the fundamental importance of diversity, equity and inclusion."

*Google's (Alphabet) 2022 Sustainability Bond Impact Report – "In August 2020, we issued $5.75 billion in sustainability bonds, leading the way with the largest sustainability or green bond issuance by any company in history at the time. The net proceeds funded new and ongoing projects that are environmentally or socially responsible and enable investors to join us in tackling critical issues."

*UnitedHealth Group's 2021 Sustainability Report – "We engaged with key suppliers in one-on-one conversations to better discuss relevant ESG issues."

The Nerve asked the above companies in writing about how much influence major investment-management firms have on shareholder proxy votes in their respective companies. Amazon spokesman Glenn Kuper in an email response didn't provide specifics, saying generally that the "ownership percentages of various shareholders, including investment management firms, is in the public record."

"Their influence on the vote is based on how many votes they have," he added. "I really don't have anything beyond that."

Microsoft in an automatic email reply acknowledged receiving The Nerve's request but didn't give any further response. Apple, Google and UnitedHealth Group didn't respond.

Loftis said conservative leaders in South Carolina and other states need to take tougher stands to stop ESG agendas from spreading through state pension systems.

"The left outfought us," he said. "We've had an abundance of cowardice."

Brundrett is the news editor of The Nerve (www.thenerve.org). Contact him at 803-394-8273 or [email protected]. Follow him on Twitter @RickBrundrett. Follow The Nerve on Facebook and Twitter @thenervesc.

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