Iowans have an opportunity to force asset managers to decide whether they will act to support the financial interests of Iowans or use their liabilities as a weapon to further a political agenda.
The proposed state legislation, known as Senate File 507, would protect free enterprise and Iowa taxpayers by codifying two common-sense principles: taxpayer dollars—specifically, public pension funds—must be invested on a cash basis (i.e. .financial) considerations and not in pursuit of a 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 — have already passed legislation similar to Iowa’s proposal to protect taxpayers from investment managers who put politics and ideology above their duty to the people.
Meanwhile, 14 other states — including California, Illinois and New York — specifically direct public funds to advance so-called environmental, social and governance principles called ESG. As residents and capital continue to leave states that adopt woke policies — in taxation, investment and education — these 14 states are hardly ones to emulate.
On a practical level, boycotting businesses that are unfavorable to the far left and investing according to ESG values can indeed prove very profitable for an asset manager who receives 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 choice should be allowed – despite the possibility of suboptimal return on investment.
However, those who manage and invest taxpayer dollars (including managers of public pension plans) should not put awakened ideological pursuits ahead of their fiduciary duties.
Debunking myths
Opponents of this practical reform continue to spread a lot of misinformation about the specifics. So let’s dispel some myths.
First, not all boycotts are targeted. Eligibility depends on whether the fund manager has a “reasonable business purpose” to boycott a business or investment sector – purposes such as mitigating risk, complying with the law or promoting financial success.
Not all logging, mining, agricultural, firearms or fossil fuel companies are equally sound investments. Nor do all sectors fit all risk profiles. Importantly, Iowa’s legislation would prohibit the state from contracting with companies that boycott companies in those sectors for non-property reasons, such as violating the zero-carbon policy.
Opponents of the legislation suggest that a company simply “accused” of participating in these disruptive boycotts would be barred from doing business with Iowa and that the standards for listing such companies are “ill-defined.” These notions are false.
Maybe they should familiarize themselves with the legislation.
A simple “accusation” would not be enough to cut ties with a company. Even before it is included in a list of companies engaged in boycotts or non-cash investment methods, the bill stipulates that the fund “relies and relies” on a legally defined set of information, including from statements of companies, research firms and government agencies.
According to the bill, if a company does engage in these boycotts or investment methods, notice will be provided to the company that such activity may interfere with business opportunities with the state. The company will have a chance to stop such prohibited conduct.
Not an undue burden
In fact, Iowa’s legislation would allow state and local governments to wait as long as 18 months after notification is given to stop entering into new contracts with these companies.
This detailed process for identifying problem companies, the long notice period, sufficient time given to businesses to change such disruptive practices, and the flexibility to terminate existing contracts would ensure minimal disruption to government services.
Opponents of the Iowa bill say it would be an undue burden on local governments. Far from it.
First, many service providers – financial or otherwise – are not committed to pursuing ESG. Other states that have already adopted these taxpayer protections are finding that.
Opponents point to a Wharton study that predicted higher interest costs for issuing municipal debt in Texas after similar legislation passed there. However, this prediction is not due to higher risk, but to a prediction that all five of the largest municipal insurers will exit the Texas market.
As it turns out, Fidelity Investments has confirmed it will comply with the new law. In addition, other banks will also step in to offer to assume liabilities.
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.
Second, in the rare cases where no alternatives are available, the bill would allow sufficient leeway for exceptions to the general rule. It also clearly provides that “premature or otherwise reckless termination of a contract” is not required.
Risky business
To be clear, asset managers engaged in ESG-style investing expose their clients to risk.
Consider the social impact report of Signature Bank ($SBNY) — a leading bank that is now nearly insolvent after explicitly boasting that it “seeks out and engages in socially and environmentally conscious lending activities.” Signature Bank also boasted:
The bank-wide credit policy … describes the types of credit it is considered to have [a] significant negative impact on society and the Bank seeks to avoid lending that could potentially have harmful consequences. As a result, we do not engage in lending to fossil fuel projects or companies; for the production of firearms, armaments and military products; [and] to private prisons.
This prospect serves as a stark reminder of the need for Iowa lawmakers to affirm that those who manage taxpayer resources put the needs of taxpayers first.
Ideologically driven, woke boycotts and asset divestitures violate asset managers’ fiduciary duty to the people of Iowa and betray the trust of taxpayers. These malinvestments hurt beneficiaries by reducing retirement security and ultimately hurt taxpayers either with higher taxes or reduced government services from lower returns.
ESG oriented investment schemes negatively impact the nation by cutting off capital in some of the most profitable and necessary sectors of the economy.
With Communist China as a growing threat, state lawmakers have a national role to play in opposing boycotts of investments in fossil fuel, mining and agricultural companies that make us more dependent on the Chinese as a major supplier of basic needs.
Iowa Senate File 507 would prevent hedge funds, mutual funds, equity funds or banks from trading their fiduciary duty to Iowans for their own woke social, political or environmental agendas.
This piece originally appeared on The Daily Signal