Ohio Passes Bill Barring State Pension Funds, University Endowments From Prioritizing ESG in Investing, Stakeholder Activism

A bill passed in Ohio seeks to limit the state’s five public pension funds, the workers’ compensation bureau and university endowments in the state from perusing investments influenced by social and environmental policy. Ohio Senate Bill 6, passed on Tuesday, will also aim to ban funds from engaging in shareholder activism.

The bill passed in the Ohio Senate in May 2023, by a vote of 26 to 7. The House passed the bill on Tuesday, 62 to 27, and it now awaits a signature from Ohio Governor Mike DeWine.

The bill cites the fiduciary duty of the governing boards of the pensions, compensation bureau and endowments and requires them to “make investment decisions with the sole purpose of maximizing the return on its investments.”

It goes on to order that each of the named funds’ boards “shall not adopt a policy, or take any action to promote a policy, under which the board makes investment decisions with the primary purpose of influencing any social or environmental policy or attempting to influence the governance of any corporation.”

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Impact of the Bill

The restrictions will apply to the Ohio Public Employees Retirement System ($106.5 billion assets under management), the Ohio Police & Fire Pension Fund ($18.90 billion), the State Teachers Retirement System of Ohio ($97 billion), the School Employees Retirement System of Ohio ($19 billion) and the Ohio Highway Patrol Retirement System ($1 billion).

In the case of state colleges and universities, the bill also gives trustees the authority to reject a bequest to their endowment “because the bequest specifically requests the donation be used with the primary purpose of influencing any social or environmental policy, including by attempting to influence the governance of any corporation,” but it makes clear that if trustees accept a bequest with such conditions, they must comply with any conditions of the request regarding its purpose.

The legislation faced pushback from labor groups, including the Ohio AFL-CIO, the Ohio Federation of Teachers and AFSCME Ohio Council 8.

“To do right by Ohio’s retirees, pension fund managers must consider all potential risks,” said Frances Sawyer, founder of environmental research and policy firm Pleiades Strategy, in a statement. “This bill limits their ability to do so and prevents them from upholding their fiduciary duty to protect the hard earned retirement savings of the teachers, firefighters, sanitation workers, and all the public employees who keep states running.”

The legislation also applies to numerous state college and university endowments. A board of trustees of an Ohio-based endowment will not be allowed to “permit any person or entity to which it delegates the management of part or all of its endowment portfolio to engage in or promote such decisions or policies,” the legislation states.

“SB 6 reinforces SERS’ approach to investing,” a spokesperson for SERS told CIO. “Our diversified investment portfolio is designed to meet our statutory and fiduciary obligations and the legislation doesn’t change anything we are currently doing. Our fiduciary responsibilities to our membership ultimately guide our investment decisions.”

Shareholder Activism Elsewhere

Many large public pension funds, such as the California Employees’ Retirement System, are active shareholder activists and use their large stakes in companies to influence governance decisions in portfolio companies. One example came when CalPERS and several institutional funds sought in a failed shareholder proposal to remove the CEO and certain board members of ExxonMobil.

In April, New York City Comptroller Brad Lander, representing three of the city’s pension funds, reached an agreement with JPMorgan Chase, Citigroup and the Royal Bank of Canada to disclose their ratio of clean energy financing to fossil fuel financing.

Many of these large institutional investors are also engaged in several initiatives to achieve net-zero portfolios. CalPERS, for example, is more than halfway to its goal of allocating $100 billion to its climate solutions investments strategy and aims to have a net-zero portfolio by 2050.

Marcie Frost, CalPERS’ CEO, published Thursday an article about both the significant risk and the opportunities posed to the fund’s investment portfolio by climate change.

“We are playing a leadership role in the market to establish climate investment standards, and we welcome other investors to join us in that effort,” Frost wrote. “Our members want to know that our climate investments are paying off. Earning and keeping their trust means having the right tools to do our job.”

Members of the U.N.’s Net Zero Asset Owner Alliance, a coalition of 89 global asset allocators who collectively manage $9.5 trillion, are dedicated to reducing the emission intensity of their portfolios. Approximately 81 members, representing $8.4 trillion, have set net-zero targets.

Red State Pushback

Achieving these goals often means divesting from and excluding fossil fuel producers; engaging with portfolio companies through dialogue and voting in shareholder meetings; and investing in companies, technologies and funds that are aligned with sustainability goals.

Legislators in many states view such activities as ignoring the fiduciary responsibility of a public fund, which is to act in the best interest of its beneficiaries. The Ohio bill, like similar legislation in other states designed to prohibit ESG investing, includes language that states that the boards of these funds must make investments with a goal of maximizing returns.

According to Pleiades Strategy, which monitors anti-ESG legislation, six such laws are currently pending in Michigan and Pennsylvania. Since 2020, 43 “anti-ESG” investing laws have been implemented across the country, and 315 bills are dead or had amendments which removed anti-ESG provisions.

In a complaint filed earlier this month, 11 Republican states accused asset managers BlackRock, Vanguard and State Street of conspiring to restrict and suppress the coal market through their large stakes in a number of coal companies.

In September, a federal district court barred Missouri from enforcing rules that prohibited investment advisers from utilizing ESG factors when making investment decisions (absent written consent of the client). In October the Missouri Attorney-General abandoned plans to appeal.