Arkansas panel votes to ban state investments with managers who consider ESG factors

Arkansas lawmakers voted on Wednesday to divest state holdings from financial services providers that do not invest in energy or firearms companies.

Approval from the House State Agencies and Government Affairs Committee was House Bill 1307‘s first step to becoming law. It now goes before the full House for consideration.

The bill directs the state treasurer to compile of a list of financial services providers that discriminate against fossil fuel companies, firearm manufacturers, ammunition makers or otherwise refuse to deal with based on environmental, social justice and governance (commonly known as ESG) factors.

Public entities — like public retirement systems and the state treasury — would have 60 days or one year to divest from the listed providers, depending on the type of investment.

If enacted, the legislation would add Arkansas to the growing list of mostly Republican-led states that have targeted ESG criteria in public investing. Critics say the laws end up costing states millions and even billions in the long run.

Asked if Arkansas would see similar financial hits from the bill, sponsor Rep. Jeff Wardlaw (R-Hermitage) said the bill exempted “indirect holdings;” for example, many retirement plans such as 401(k) and 403(b) plans.

“We exempted indirect holdings trying to avoid some of that major hit,” Wardlaw said. “But we also want to make sure that we’re following our beliefs in the state and make sure that we’re ensuring no one is discriminating against the industries that are important to Arkansas.”

Essentially, Wardlaw and others around the country don’t want investment managers to use their positions to harm industries they dislike for political reasons, putting ideology ahead of sound investing. However, investment experts say that some ESG criteria — like a company’s resiliency to a changing climate — should be taken into consideration.

Former Arkansas State Treasurer Dennis Milligan last year divested $125 million from money market accounts with BlackRock, the world’s largest asset manager and one of the primary targets of the anti-ESG movement.

The Arkansas Teachers Retirement System is invested in two funds managed by BlackRock.  A passive global index fund
valued at around $900 million and a fixed-income fund valued at about $258 million.  The system, through its investment managers, also owns roughly $12.8 million of BlackRock stock and about $18 million in shares of
mutual funds managed by BlackRock.

“The ATRS Board makes investment decisions based upon recommendations from the ATRS investment consultants,” said Arkansas Teacher Retirement Deputy Director Rod Graves. “Aside from state and federal regulations, ATRS does not have a ESG or social investing mandate and the ATRS investment policy is designed to maximize results for the participants in a prudent and fiduciary manner.

“Our current understanding is HB1307 has an exemption for indirect holdings.  Based on that understanding, ATRS staff does not anticipate HB1307 will require any drastic changes to the ATRS investment portfolio.”

Officials for the Arkansas Public Employees Retirement System couldn’t be reached for comment on Wednesday.